March 2, 2020

Fed Lead Equities Higher in Europe

Fed Lead Equities Higher in Europe

European futures are trading sharply higher as traders are optimistic about the support from central banks around the globe. The Federal Reserve over in the US is ready to reduce the interest rates this month. The upcoming March meeting is a live one now. The Fed issued a rare statement on Friday in order to address the concerns of the markets as Coronavirus knocked on the US shores.

One could say that the statement made by the Fed on Friday was a forced reaction. The sell-off in equity markets scared them. Basically, the pace of the equity markets sell-off left no other option for the Fed but to intervene in order to calm investor’s nerves.

The fact is that we are facing a situation where it is not the amount of interest rate (basis points) cut that matters the most, but the commitment and the support of the Federal Reserve that stands taller than anything else. Investors just need to know that the central banks are there to support the economy.

I think it is highly likely that we are going to see a more coordinated action from central banks around the globe from here onwards. This is because the Federal Reserve was the toughest cookie to crack, and if this bank is forced to do what the markets want from them, then it is highly likely that other central banks such as the European Central Bank, the Bank of England, the Bank of Japan, will follow in the footsteps of the Federal Reserve.

So, this week could be dominated by two kinds of headlines. firstly, the bad set of economic numbers, such as today’s economic data—the Chinese Caixin Manufacturing PMI number fell to 40.3 against the forecast of 46.1. And if this number doesn’t scare you, the Chinese factory activity tumbled to their lowest level on record, it dropped to 35.7. Finally,  the dovish rhetoric from other central banks to support global economy.  

There is also some skepticism regarding  the dovish stance of the banks, people are asking whether this can really help the current situation? It is arduous for factories to churn out goods if they can’t get the material from abroad—a disruption in the supply chain. Consumers are highly unlikely to spend or travel if they are scared of leaving their homes because there is no vaccine for Coronavirus. But one thing that the stimulus or a coordinated action by central banks would do, is keep the corporate debt default number lower by pumping liquidity, as discussed on Friday.

As for the gold trading, the price dropped below the 1600 mark because investors are finding equity markets to be better investments. They have been oversold and, for them, the risk-to-reward ratio is more attractive. Having said this, the gold price is still in the green and I am holding my target of 1700 which is likely to happen due to weakness in global economic numbers.