Spot gold traded at $1,645.20 an ounce in early Asian trading on Wednesday. As the us federal reserve launched emergency interest rate cuts overnight, the dollar took a beating and gold soared. In the previous session, the dollar index fell below the 97 mark, while spot gold closed up more than $50 at $1,640.30 an ounce. At the same time, as other central Banks also cut interest rates, market panic flared, sending the ‘fear index’ to a nine-year high and sending major U.S. stock indexes tumbling, including the dow, which fell more than 800 points. Gold rose more than 3 percent in the previous session as the federal reserve announced an emergency interest rate cut overnight to help cushion the economic blow from a new outbreak of pneumonia and other major central Banks were expected to ease policy.
Analysts pointed out that in the policy decision point in time, the fed is rare, and emergency interest rate cut would cut interest rates 50 basis points on the stock market has a very strong support, but suddenly cut interest rates 50 basis points tend to appear under the situation of economic crisis, the fed’s unconventional operations for investors to smell the smell of the crisis, so the stock market collapsed, the explosive rise in gold.
“Clearly the fed’s rate cut is sending a very strong signal that they are ready to support the U.S. economy against the growing threat of a pandemic,” said Daniel Ghali, commodity strategist at td securities in New York. “it gives other central Banks the green light to follow suit.”
Lower interest rates reduce the opportunity cost of holding unyielding gold and weigh on Treasury yields and the dollar, analysts say. Gold is priced in dollars; The dollar index, which measures the greenback against a basket of currencies, fell to its lowest level in nearly two months. Gold fell 4.7 percent on Friday amid a broad sell-off, but has since recovered.
Edward Moya, senior market analyst at brokerage OANDA, said in a note that gold had rallied above $1,600 an ounce and could hit the $1,700 level again once governments announce details of major fiscal stimulus measures.
Outbreak impact appears! China’s caixin services PMI almost halved
The impact of the outbreak has become increasingly apparent, with the latest caixin services index almost halving after last week’s sharp drop in China’s official PMI for February.
The latest data released on Wednesday showed that China’s caixin services PMI came in at 26.5 in February, well below expectations of 48 and well below 51.8, the first time it has fallen below the line separating expansion from contraction since the survey began in November 2005. Meanwhile, China’s caixin composite PMI came in at 27.5 in February, well below the previous reading of 51.9.
The PMI for the services sector in February 2020 was only 26.5, almost half the previous month and the first time it has broken through the line between expansion and contraction since the survey began in November 2005, said zhong zhengsheng, chief economist at caixin.
The caixin services PMI in February 2020 was only 26.5, almost halve from the previous month and the first time it has broken through the line between expansion and contraction since the survey began in November 2005, zhong said. Consumption stagnation in the wake of the new epidemic has hit services hard. Business confidence has also fallen to historic lows, with service companies still more concerned about the uncertainty of the outbreak, despite tax and financing support for sectors and small and micro businesses that have been hit hard by the outbreak. Recent support policies for manufacturing, small and micro businesses and industries that have been affected by the outbreak have had a significant effect on manufacturing. Services suffer even more from lost cash flow than can be made up for.
China’s official PMI data released last week showed that in February 2020, hit by the outbreak of the new coronary pneumonia, China’s purchasing managers’ index dropped significantly: the manufacturing PMI was 35.7%, down 14.3 percentage points from the previous month; The non-manufacturing business activity index was 29.6 percent, down 24.5 percentage points from the previous month.
Also hit by the outbreak, data released on Monday showed China’s caixin manufacturing PMI for February came in at 40.3, lower than expected at 46.3 and less than the previous reading of 51.1.
Zhong zhengsheng, chairman of caixin think tank monita research, commented that the caixin China manufacturing PMI in February 2020 was the lowest since the survey began in 2004, at 40.3, down from a low of 40.9 during the 2008 financial crisis. A new outbreak of pneumonia swept across the country, disrupting much of the economy and contributing to the decline in manufacturing.
The federal reserve cut interest rates overnight! Other central Banks around the world are expected to follow suit
As the rba fired its first shot at cutting rates, the us federal reserve cut its overnight emergency rate by 50 basis points, and other central Banks such as the Hong Kong monetary authority, the central bank of Malaysia and the central bank of the united Arab emirates also started cutting rates during the Singapore pneumonia crisis.
The us federal reserve on Tuesday cut its benchmark interest rate by half a percentage point to a target range of 1-1.25 percent in response to the growing economic threat posed by a new coronavirus, the first emergency rate cut since the 2008 financial crisis. Fed chairman colin Powell said the central bank would continue to monitor the spread of the coronavirus and adjust policy accordingly, but suggested the response would still be rate cuts, not additional asset purchases or quantitative easing.
“The fundamentals of the us economy remain strong,” the fed said in a statement. However, coronavirus outbreaks pose an evolving risk to economic activity. In view of these risks and in support of the objectives of maximum employment and price stability, the federal open market committee today decided to lower the target range for the federal funds rate.”
Fed chairman colin Powell later said the emergency rate cut came after officials saw the coronavirus was having a material impact on the economic outlook.
However, US President Donald trump is still calling for the fed to ease monetary policy further in line with other countries/competitors. It said it was working with congress to pass an estimated $8.5 billion emergency funding bill for the new coronavirus.
After the fed’s surprise emergency rate cut, the market is still pricing in a 68.6% chance of a further quarter-point cut to 0.75% to 1.00% in April, according to CME fed watch.
Danske said on Tuesday that the fed could cut rates by another 50 basis points this spring.
As the fed moves, other central banks are expected to follow suit. The UK money markets have now fully priced in a 25 basis point cut in March from an earlier 85 percent chance. Meanwhile, the bank of Canada is expected to cut interest rates by 39 basis points on Wednesday. Separately, eurozone money markets are now pricing in a 90 percent chance that the ECB will cut interest rates by 10 basis points next week, up from just 75 percent earlier in the day, according to ECB watch. Already on Tuesday, the rba cut its march cash rate by 25 basis points to 0.50 percent, a record low from 0.75 percent. The rba also said it was prepared to ease monetary policy further.
The bank of Canada will announce its decision on Wednesday at 23:00 Beijing time. Money markets are pricing in a 40 percent chance that the bank of Canada will cut rates by 50 basis points.
Economist Michael Brown said he expected a bank of Canada rate cut on Wednesday to be a foregone conclusion, with the question of whether to cut by 25 basis points or 50.
The bank of Canada is expected to cut interest rates by 50 basis points on Wednesday, up from a previously expected 25 basis points, the Canadian imperial bank of commerce wrote on Tuesday.
Analysts at CIBC said: “the fed has stepped in, but not by 50 basis points as we had expected, but surprisingly they didn’t wait for this month’s policy meeting, which is only about two weeks away. It shows that the fed is concerned about the current situation.”
“For the bank of Canada, a rate cut this week is inevitable, but certainly not between policy meetings, which have opened the door to a 50 basis point cut,” the CIBC analysts added.
The rest of the session will focus on U.S. ADP payrolls, the ISM non-manufacturing PMI, the bank of Canada’s interest rate decision, the federal reserve’s beige book of economic conditions and the meeting of European Union finance ministers and the European central bank.
David Govett, head of precious metals at Marex Spectron, said: “I think we have done enough for gold to fall and with a lot of talk about rate cuts/stimulus coming up, the next step should be up. However, it does depend on the scale of support provided by central Banks.”
Lukman Otunuga, senior research analyst at FXTM, said: “while the technical side suggests gold could extend its decline, the fundamentals remain bullish. During the outbreak of pneumonia, and especially after the organisation for economic co-operation and development cut its 2020 global growth forecast from 2.9 per cent to 2.4 per cent, youth training around loose monetary policy and general market unease should support gold demand, especially given the potential depreciation of the us dollar.”
Phil Flynn, chief market analyst at Price Futures Group, noted that the fed removed all market uncertainty. On the one hand, there is no question that the fed’s aggressive 50 basis point rate cut will be bullish for gold, which is already very strong. Because the market had expected a rate cut; With this unexpected cut in interest rates, in fact, the market also in the early digestion of a part of this bullish factor. “But in the end, as our experience tells us, the fed cut rates. Although we haven’t had a smooth day and we’ve had some volatility in gold prices today, we think the gold market is on the up and up.”
RBC Wealth Management notes that gold has received some of the boost from rising expectations of further fed rate cuts. “Lower margin demand, the start of the new month and expectations of fed rate cuts are all contributing to the rally.”