Via Financial Times

US futures and Asian stocks dropped on Monday despite aggressive measures from the Federal Reserve including cutting rates to near zero for the first time since the global financial crisis.

Futures markets pointed to a 4.8 per cent decline in the benchmark S&P 500 index when it starts trading later in the day. Futures at one point were limit down, suggesting a 5 per cent fall.

On Sunday the Fed delivered its second emergency rate cut of the month and announced sweeping measures to address the turmoil that has swept across financial markets. The US central bank slashed its main policy rate by a full percentage point to between 0 and 0.25 per cent — a level last seen in 2015. 

It unveiled at least $700bn in asset purchases aimed at easing strains in the US Treasury and mortgage markets, as well as the expansion of dollar swap lines with other central banks.

The 10-year US Treasury yield fell 29 basis points to 0.6682 per cent following the Fed’s move. Yields fall as prices rise.

In Asia-Pacific markets, Australia’s S&P/ASX 200 index dropped 7.4 per cent while Hong Kong’s Hang Seng fell 2.5 per cent and China’s CSI 300 shed 1.4 per cent. Japan’s benchmark Topix was up 0.5 per cent after the central bank announced it would hold an emergency policy meeting at noon on Monday.

The Japanese yen, a haven during times of uncertainty, rose 0.6 per cent to ¥107.91 per dollar.

“The Fed has thrown everything at this. If we are now facing the end of central bank action, it means we are on our own,” said Seema Shah, chief strategist at Principal Global Investors. “There is a fear settling in the market, investors are terrified that this was all that was left.”

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While the Fed’s measures were stronger than expected, news of the outbreak’s spread over the weekend had meant that investors were girding themselves for another market drop.

Zach Pandl, an analyst at Goldman Sachs, suggested that central bank action may only help “on the margin”, pointing to the accelerating outbreak in Spain and France and shutdowns in some US schools. 

But he added that it “should significantly ease funding market stress, particularly the dollar shortage overseas”. More government spending will be needed to dampen demand for US treasuries, he added.

Joachim Fels, Pimco global economic adviser, said policymakers will need to take further action “to prevent what currently looks like an inevitable recession from turning into a depression, and financial markets to go from a drawdown to a meltdown”.

On Monday, China’s central bank injected about Rmb100bn ($14.3bn) of liquidity into financial markets via its medium-term lending facility. But traders said it was unlikely to immediately cut its benchmark lending rate as this may not help the real economy, where supply chains and other industries have been hit by coronavirus.

“Over the next month or even quarters there is going to be easing of both monetary and fiscal policy, but I don’t think they want to do it now,” said a trader at one Shanghai-based brokerage.

Following the Fed’s move, New Zealand’s central bank cut interest rates by 0.75 percentage points to 0.25 per cent.

Oil prices recommenced their descent shortly after markets opened, with international marker Brent crude losing 3.1 per cent to $32.80 a barrel.

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Analysts have grown worried that even forceful monetary easing will only go so far in softening the economic impact of coronavirus. Many are anxious for governments to aggressively spend to make up the shortfall in demand. 

“They are pulling out all the stops. This tells you this is a serious situation,” said Torsten Slok, chief economist at Deutsche Bank Securities. “There are now also zero interest rates in all OECD countries. This tells you there is limited firepower left now. They have decidedly handed over the baton now to fiscal policy.”

Additional reporting by David Sheppard and Jennifer Ablan