Asian markets plunged after a combination of abysmal China data and downbeat signals from the US Federal Reserve wreaked havoc on investor sentiment.
The week kicked off with the US Federal Reserve joining the growing queue of central banks that are pledging to rescue markets after the precipitous fall not seen since the Black Monday plunge 33 years ago.
On Sunday, in yet another emergency measure, the second of this month, the US Federal Reserve decided to lower the target range for the federal funds rate to 0 to 1/4%. It said it would expand its balance sheet by at least US$700 billion in coming months to support the smooth functioning of markets.
Towards this it said it would “increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion.”
While this may provide a shot in the arm for risk assets and help to address liquidity concerns in addition to the US federal stimulus action, it uncovered some negative possibilities.
“It also raises the question of whether the Fed has anything left in the tank should the spread of the virus not be contained,” said J.P. Morgan Asset Management Global Market Strategist Kerry Craig.
Earlier on Monday, China unveiled a rash of horrific data, sending tremors through markets already worried about the worsening coronavirus crisis.
China’s fixed asset investments in the January February period contracted 24.5%, a fall much steeper than the estimated 2% forecast. The country’s industrial output in the first two months of the year dropped 13.5%, falling more speedily than the -3% forecast, and retail sales plunged 20.5%, worse than the forecast contraction of 4%.
The fast spreading virus which has claimed 6,513 lives and infected almost 170,000 people globally remains on top of investor minds as the MSCI Asia Pacific ex-Japan index slid 2.9%. The Australian S&P ASX 200 plummeted 9.7%, South Korea’s KOSPI benchmark fell 1.5%, Hong Kong’s Hang Seng index dropped 3.2% and the CSI 300 benchmark retreated 2.76%.
Japan’s Nikkei 225 closed 2.5% lower after earlier being up 0.1%, outperforming the region as the Bank of Japan decided on additional easing measures at a policy board meeting on Monday.
The Japanese central bank introduced special funds-supplying operations and announced purchase plans for Japanese government bonds, J-REITs and ETFs.
In a co-ordinated move, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve and the Swiss National Bank announced a coordinated action to enhance the provision of liquidity via the standing US dollar liquidity swap line arrangements.
The BOJ also announced a schedule for conducting auctions for the US dollar funds supplying operations for the term of one-week and three-month.
“The measures announced by the Bank of Japan today lack teeth and we still believe that the Bank will eventually lower its short-term policy rate. The Bank brought forward the meeting scheduled to end on Thursday to today, but decided not to follow up the 100bp cut by the Federal Reserve with a cut to its own short-term policy rate,” said Marcel Thieliant, Senior Japan Economist at Capital Economics.
These shockwaves have sent investors to the safe havens – 10-year US Treasuries yields dropping 70 basis points to 0.66%, gold jumped 1.1% and the Japanese yen is 0.7% higher. Western markets are likely to open on a gloomy note – Euro Stoxx futures are 3.2% lower and S&P Futures are down 4.8%.