Financial markets are making a sharp recovery after the precipitous fall not seen since the Black Monday plunge 33 years ago. Expectations of fiscal support measures are rising in addition to the deep rate cuts by various central banks already included in bond prices.
This helped rescue the MACI Asia Pacific ex-Japan index off lows – the benchmark closing just off 0.68%. Earlier, the Nikkei 225 index tumbled 6.08% after falling 10% during the day and Australia’s S&P ASX 200 benchmark rose 4.42%, following the central bank’s liquidity injection. The index had fallen 7.6% at one point.
China unleashed a wall of liquidity by cutting the reserve requirement ratio (RRR) by 50-100 basis points (bps) on Friday, which will release 550 billion yuan into the banking system. This liquidity adds to the 800 billion and 900 billion pile that was released during the last two RRR cuts in January 2020 and September 2019.
It was preceded by Reserve Bank of Australia’s decision to add A$8.8 billion into short-term bank funding – more than double the usual daily amount and an announcement by the Bank of Korea it could make an emergency rate cut to support the economy.
Norway’s central bank delivered a half-point cut to its main interest rate and Sweden’s central bank is lending more money to its banks to offset the liquidity squeeze.
And while markets are expecting a 100-basis-point cut at next week’s Federal Reserve meeting, the key issue is credit availability to a limping economy.
Scepticism over need for rate cuts
“We are sceptical that such deep rate cuts are necessary or sufficient as a policy response, but we doubt that the Fed will risk under-delivering,” said Steve Englander Standard Chartered strategist in a note.
“We think the Fed will recognise that asset markets will respond positively to policies that help viable companies to survive the economic disruption from the outbreak. This points to an emphasis on ensuring that banks deliver cheap credit to businesses and even households, rather than focusing on the Fed funds and Treasury yields. Massive policy easing without credit measures would probably not restore confidence. Credible credit measures would likely improve the tone of markets, even if policy rate cuts are limited.”
This is causing a sharp rally in western markets with the S&P 500 index 5.6% higher on the heels of the 6.6% surge in the Stoxx Europe 600 index.
“The European Central Bank (ECB) disappointed markets by maintaining its main deposit rate at -0.5%, but it announced a €120-billion bond purchase program and more attractive terms on targeted longer-term refinancing operations, a tool which offers loans to banks at a preferential rate. RBC Capital Markets notes that this is in effect a targeted rate cut to support the banking system. The ECB is also giving banks some capital relief by allowing them to run lower capital ratios,” said Frédérique Carrier, Head of Investment Strategy, RBC Wealth Management.