Additional action by the Fed fails to calm markets

Mar 16, 2020

Markets continue to be rattled today after coordinated stimulus action by global central banks over the weekend failed to calm investors’ fears over the impacts of the coronavirus pandemic.  

To help improve liquidity and global funding markets, the Federal Reserve surprised the market with another massive interest rate cut yesterday (1%) taking their benchmark rates down to 0-0.25%. They also announced fresh stimulus measures by promising up to $700 billion of new bond-buying scheme (quantitative easing). Overnight, New Zealand, Australia and Japan also announced their own measures.

The spread and impact from the virus has been worsening and an increasing numbers of countries are declaring states of emergency and going into shutdown. This has led to huge drops in global stock markets amid fears this economic paralysis could trigger a global recession and stifle corporate earnings. Traders have been dumping riskier assets in favour of perceived safe haven assets. The Pound is very vulnerable to shocks in market risk appetite due to our huge exposure to financial services and our heavy reliance on foreign investment. Furthermore, with the ongoing Brexit negotiations Sterling’s perceived risk status also increases.

Consequently, the Pound has suffered some major losses over the past week. The GBP/USD has hit fresh 5-mth lows having lost nearly 10-cents in the past week. The GBP/EUR has slid to 6-mth lows after losing over 5-cents since last Monday.

Developments surrounding the coronavirus will continue to dominate risk sentiment and the volatility levels are likely to remain high. EU finance ministers are due to hold a conference call to discuss the situation and their next moves. So far the EU have been relatively slow to act and markets will be watching closely to see whether they can provide anything new to calm nerves. Further stimulus measures from the Bank of England are also expected – possibly re-starting quantitative easing –  as well additional action from the UK government.