Global financial markets were shaken again on Monday as an emergency interest rate cut by the federal reserve failed to stem fears and us stocks suffered their biggest one-day fall since the black Monday crash of 1987. The gold market has also been volatile, with prices falling more than $120 in intraday trading on Monday, but recovering nearly $70 from a low on Monday and now trading above $1,500 an ounce.
In 1987, “black Monday” saw the dow close down nearly 3,000 points
Us stocks suffered their biggest daily fall since 1987 on Monday, with the s&p 500 closing at its lowest level since December 2018, as investors worried that the new coronavirus pandemic was finally proving to be a formidable adversary that central Banks, lawmakers or the White House could not contend with.
The s&p 500 fell about 12 percent, its biggest one-day drop since black Monday 30 years ago, even as the federal reserve unexpectedly cut interest rates to nearly zero on Sunday night. It was the fed’s second emergency rate cut in less than two weeks, and it couldn’t wait for its policy meeting scheduled for Tuesday and Wednesday.
The dow Jones industrial average closed down 2,997.1 points, or 12.93 percent, at 20,188.52. The s&p 500 closed down 324.89 points, or 11.98 percent, at 2,386.13. The nasdaq closed down 970.28 points, or 12.32 percent, at 6,904.59.
CNBC, a us financial website, said it was the dow’s third-biggest one-day drop in its history, behind the two “black Mondays” of October 19, 1987, and October 28, 1929.
The three major U.S. stock indexes posted their biggest daily decline since 1987 and their first three-day losing streak of more than 9 percent since the 1929 financial crisis.
Trading on Wall Street was suspended for 15 minutes shortly after the opening bell as the s&p 500 plunged 8 percent, exceeding the 7 percent threshold that triggers a one-step circuit breaker.
The fed’s emergency easing measures have heightened concerns about the rapid spread of the disease and how it has paralyzed parts of the world economy, squeezing corporate revenues.
Major stock indexes have closed at their lowest since President trump said the outbreak could continue into August. Mr Trump has warned that the us economy could be heading for a recession because of a new pneumonia outbreak. However, he said the us economy could rebound sharply after the virus disappears.
“The rapid global spread of the new coronavirus has dramatically increased investor uncertainty and shaken global financial markets,” strategists at MRB Partners said in a report.
“Looking ahead, the number of recent active cases is likely to worsen,” they said.
On Sunday afternoon, the federal reserve abruptly cut interest rates to nearly zero and launched a massive $700 billion quantitative easing program to deal with the impact of a new coronavirus on the U.S. economy. This follows the fed’s emergency half-point interest rate cut in the past two weeks and the expansion of overnight credit refinancing in the financial system to $1,500bn.
The fed cut its target range for the federal funds rate from 1% to 1.25% to 0% to 0.25%. In the face of highly volatile financial markets, the fed also cut the emergency lending rate at the Banks’ discount window by 125 basis points to 0.25 percent and extended loan maturities to 90 days.
In conjunction with the rate cut, the fed also announced a massive $700 billion program of quantitative easing, which included buying back at least $500 billion in Treasury bonds within months and adding at least $200 billion in mortgage-backed securities. It is also unusual. After the 2008 financial crisis, the fed launched at least three rounds of quantitative easing.
In response to the stock market rout, the federal reserve cut interest rates by an emergency 50 basis points on March 3, an unusually intense rate cut. After the 2008 financial crisis, the federal reserve cut interest rates all the way to the ultra-low level of 0-0.25% to save the economy and then continued its zero interest rate policy for seven years.
The New York Times analysis said that despite the fed’s intention to stimulate the economy, these “big moves” were instead seen by the market as a sign that the economy was about to run into trouble.
Hao hong, managing director and head of research at bocom international, interpreted the fed’s aggressive action as bringing a sense of “Armageddon” to the market. Mr Hong thinks the fed has fired most of its bullets.
And in times of crisis, the market’s trust in the fed may be more important than the fed’s actual monetary policy operations, hong said. As a result, u. s. stock futures again circuit breaker plunge.
Wang sheng, deputy general manager and chief strategist of shenwan hongyuan research, believes that this kind of quick easing behavior cannot really calm global financial sentiment. What the core financial markets are looking for is to see a credible response to the new pneumonia outbreak, rather than simply a loose hand.
“They blew it,” said Michael O ‘Rourke, chief market strategist at JonesTrading. The fed panicked and markets took fright. The s&p 500 hit a record high less than a month ago, and the fed has exhausted all its conventional and unconventional tools. The key point is that they have really used up all their ammunition and this is what a panicked central bank did.”
“The market may have deepened its concerns by seeing the fed’s reaction as panic,” Mizuho Bank analyst Vishnu Varathan wrote in a report.
The world health organization (who) on Monday reported a total of 168,019 confirmed cases of pneumonia and 6,610 deaths worldwide as of 16:00 central European time (23:00 Beijing time), with 148 countries and regions reporting cases.
Gold fought back after plunging more than $120
The gold market was in a particularly volatile session on Monday, falling more than $120 in intraday trading, but at one point the precious metal rebounded nearly $70 from its lows. Spot gold is back above $1,500 an ounce.
Despite the fed’s further emergency measures, sentiment deteriorated, with gold falling more than $120 from its session high at one point on Monday, falling below $1,500 an ounce and hitting a low of $1451.10 an ounce, or 5.1 percent.
However, gold recovered nearly $70 from its low in early trading, pared losses and closed down $15.25, or 1.0%, at $1,514.06 an ounce.
Gold rebounded after hitting its target of $1,453.10 an ounce and tested resistance at $1,509, according to an article on Economies.com.
According to Economies.com, gold would need to fall below $1,453.10 an ounce to confirm a move towards $1,400.00, with a further bearish target at $1,307.10.
Gold, traditionally known as a “safe haven”, usually does well during market sell-offs, but it was not immune to last week’s plunge in global equity markets as the coronavirus pandemic spread.
Analysts attributed the historic drop in the past week to investors’ “rush to cash in” as they abandoned all asset classes to hold money to cut losses.
Stephen Gallo, head of European currency strategy at BMO Capital Markets, said in a report on Monday that demand has shifted to physical cash over the past week, which has been good for the dollar and has hurt precious metals prices.
He added: “this momentum seems to have continued at the beginning of the week and there is little sign that this liquidity is abating.”
Adrian Ash, head of research at online trading platform BullionVault, told CNBC on Monday that there was a “cash rush” in the market and that he expected prices to fall further in the short term. Typically, consumer demand for jewelry still isn’t there, he said, and many funds and investors are unwinding their positions to profit from the surge in gold prices in recent months.
“In the past, when prices fluctuated, consumer demand came in and set a floor for prices,” he said. But I think what we’re seeing now is more like what we saw during the Lehman Brothers crisis, where the price of gold went through a lot of volatility, and a lot of new investors who were shocked turned to gold as a safe haven, and they saw the volatility.”
“Selling to cash out is still the norm in the gold market,” said Ryan McKay, commodities strategist at TD securities.
FXStreet analyst Yohay Elam said the fed’s move was reminiscent of the 2008 financial crisis. The outbreak is still spreading overseas, and the collapse in crude oil prices has added to concerns about the global economy’s momentum, raising fears of deflation. As a result, both the stock market and other risky assets, as well as gold, silver, treasuries and other safe-haven assets have been killed.
Jim Wyckoff, the senior market analyst at Kitco, wrote that the current panic in global markets is nothing short of the historic market volatility of the past few decades: the 1987 stock market crash, September 11, 2001, terrorist attacks on the United States, and the 2008 global financial crisis.