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Aussie shares look set to open sharply lower after a round of emergency rate cuts triggered fresh jitters on financial markets.
ASX SPI200 index futures tumbled 84 points or 1.3 per cent after the US Federal Reserve followed central banks in Australia and Malaysia by announcing an immediate rate cut to cushion the economy against the economic fallout from the coronavirus. US stocks spiked, then tanked as bond yields hit record lows.
The Fed surprised the market at 10 am New York time by slashing its benchmark rate by 50 basis points to a range of 1% -1.25%. The announcement, two weeks before the next official policy meeting, was the first unscheduled cut since the 2008 financial crisis. A volatile session saw stocks initially rise as much as 1 per cent, then slump as traders interpreted the policy move as a signal the economic impact of the virus will be more serious than stock prices suggest.
“It’s great that the Federal Reserve recognises that there’s going to be weakness, but it makes me feel, wow, the weakness must be much more than I thought,” CNBC’s Jim Cramer said. “I’m now nervous. I’m more nervous than I was before.”
The Dow briefly rallied more than 300 points before rolling over to a loss of 786 points or 2.94 per cent. The S&P 500 dropped 87 points or 2.81 per cent. The Nasdaq shed 268 points or 2.99 per cent.
The Fed rate move followed a conference call between the G7 group of industrialised nations to discuss a coordinated response to the Covid-19 crisis. The group issued a joint statement saying they would use all appropriate policy tools to “safeguard against downside risks”.
“The magnitude and persistence of the overall effect on the US economy remain highly uncertain and the situation remains a fluid one,” Fed Chair Jerome Powell told reporters after the rate announcement. “The committee judged that the risks to the US outlook have changed materially.”
Traders sold banks and other stocks that face headwinds in a low-interest rate environment. The Dow Jones Bank Index sank 4.3 per cent and the S&P financial sector 3.7 per cent.
Defensive assets shone during a classic “risk-off” rotation. Bond yields hit record lows as traders loaded up. Gold jumped more than 3 per cent. Real estate and utilities outperformed.
Last night’s declines followed one of the best sessions in recent history. On Monday, the S&P 500 and Nasdaq both gained more than 4.4 per cent during their strongest rallies since 2018. The Dow secured its biggest points tally of all time, charging 1,294 points or 5.1 per cent.
Despite the overnight weakness, the ASX 200 should start today’s session comfortably above Monday’s nine-month low. The benchmark Australian index rallied 2 per cent yesterday before paring its final tally to 0.7 per cent after the RBA dropped the cash rate to a record 0.5 per cent. The big four banks closed between 1.1 and 1.7 per cent lower amid concerns about the cut’s impact on profit margins.
Buying interest in Australian mining stocks tapered as the night wore on. After rising 1.92 per cent here yesterday and 0.95 per cent in the UK overnight, BHP’s US-listed stock shed 0.7 per cent. Rio Tinto edged up 0.01 per cent in the US after jumping 2.73 per cent in the UK. The spot price for iron ore landed in China eased $1.10 or 1 per cent to US$87.85 a dry ton.
Gold logged its biggest percentage gain since June as traders sought alternative stores of wealth to the falling greenback. Gold for April delivery settled $49.60 or 3.1 per cent higher at US$1,644.40 an ounce.
The rate cut helped cruel a rally in oil ahead of this week’s OPEC meeting. Brent crude settled four cents or 0.1 per cent lower at US$51.86 a barrel after trading as high as US$53.90 on expectations of further OPEC production cuts.
The dollar climbed 0.9 per cent to 65.98 US cents as the surprise rate cut pressured the greenback.
A busy week for domestic economic news brings Q2 GDP figures at 11.30am EST. A private measure of Chinese services sector activity is due 45 minutes later. Wall Street has private payrolls data, an important indicator for Friday’s February jobs report.
