Lending markets

Markets plunged, despite Fed announcement to flood markets with $1.5 trillion short-term loans

The broader Standard & Poor’s 500 index fell into a bear market, defined as a 20% drop from a previous high. In an epic one-day rout, European markets suffered similar declines, with the Paris and Frankfurt stock exchanges losing more than 12% and London’s FTSE index losing nearly 11%.

As investors struggled to weather declines in multiple markets, few saw the bloodshed end quickly. One reason: Although the Federal Reserve has cut interest rates and the White House and Congress are working on a stimulus, these actions are not enough of the response of shock and fear to the virus needed to calm investors. Some analysts have called for more aggressive rate cuts and swift new government spending to reverse the bearish tide.

“Political flops are piling up,” Ryan Sweet, director of real-time economics for Moody’s Analytics, wrote in a note to clients.

The latest plunge began Wednesday night, as Trump began outlining his policy response to the outbreak in a widely criticized speech from the Oval Office, and accelerated once trading opened Thursday in New York. Even the Federal Reserve’s pledge to make $1.5 trillion available to smooth operations in the giant US Treasury market could not calm anxious investors.

Wall Street’s losses continued on March 13, despite efforts by the Federal Reserve to stabilize the economy during the coronavirus outbreak. (Video: Reuters, Photo: Reuters)

In the United States, meanwhile, the virus has forced schools, sports leagues and entertainment venues – including American icons – to change their plans.

The NCAA canceled “March Madness,” its first annual showcase, disappointing millions of fans. Major League Baseball and the National Hockey League also put their seasons in limbo by joining the National Basketball Association, which acted a day earlier.

Public tours of the White House have been canceled and the US Capitol and congressional office buildings will be closed to tourists starting April 1.

Even Mickey Mouse was sidelined when Disneyland announced it would be closing until the end of this month.

In Maryland, Gov. Larry Hogan (R) ordered public schools closed for two weeks starting Monday and banned gatherings of more than 250 people. Schools in Ohio, New Mexico and Michigan will close for three weeks, and Kentucky Governor Andy Beshear (D) called on all schools in the state to suspend in-person classes for two weeks. And in Virginia, Gov. Ralph Northam (D) declared a state of emergency but left school closures to local officials.

Yet at the White House, the president continued to downplay the danger of the virus. The president said he was unimpressed by reports that a Brazilian official he met at Mar-a-Lago last weekend, Fabio Wajngarten, later tested positive for coronavirus.

“Let’s put it this way: I’m not worried,” the president said when asked about exposure to the Brazilian official, who was pictured standing next to him and Vice President Pence.

While Thursday’s cascade of cancellations was notable, it was the financial markets that offered an unequivocal verdict on the response of major US and global institutions to the virus.

Wall Street’s jaw-dropping meltdown over the past month wiped out nearly all of the stock market gains since Trump’s election in November 2016. On Feb. 12, the Dow was up more than 61% since its surprise victory. Now, the total Trump-era gain is around 11%.

Thursday’s decline reflects investor unease over the handling of the crisis by world leaders, including European Central Bank President Christine Lagarde and Trump, and the emergence of structural problems in financial markets that have been ignored in the past. during an 11-year record economic expansion.

“It’s primarily the response to bad or absent leadership, particularly on the public health front, and unhelpful pronouncements from the Trump administration, the ECB and others that are fundamentally what’s driving this,” said Adam Posen, a former Bank of England rate member. implementation committee.

Lagarde sparked a sell-off in Italian government bonds with an offhand remark on Thursday that the ECB was not worried about rising funding costs for some eurozone governments. She later amended her comments in a later interview with CNBC. Likewise, the White House had to issue a clarification Wednesday night after Trump misrepresented details of his policy response to the virus in an Oval Office speech.

The dysfunctional markets were the target of extraordinary action Thursday by the Federal Reserve Bank of New York. He said Thursday he was pumping $1.5 trillion into the bond market on Thursday and Friday to ensure the smooth functioning of the short-term funding markets that banks use to lend to each other. The New York Fed said it acted “on instructions” from Fed Chairman Jerome H. Powell.

The stock was both financially esoteric — the kind of operational consideration only bond traders might appreciate — and deeply important to the health of U.S. investments. The roughly $17 trillion Treasury market is the haven for investors who want a near-absolute guarantee that they’ll get their money back. It also functions as a benchmark against which all other assets – stocks, corporate bonds, municipal bonds and commodities – are valued.

“The belief that the Treasury is a risk-free asset is the foundation of global financial markets,” said Narayana Kocherlakota, former president of the Federal Reserve Bank of Minneapolis. “Once you start losing that, you lose an anchor that’s not easily replaced.”

The Fed also announced that it will buy $60 billion worth of Treasuries for the next month, March 13-April 13, to help keep this market functioning smoothly. Earlier this week, investors reported problems trading US government bonds. These irregularities echoed the kinds of freezes seen during the 2008 financial crisis, and the Fed seemed to want to move quickly to stop them.

“It’s safe to say that the Fed almost never does what it has been doing for the past two weeks,” said Peter Conti-Brown, Fed historian and associate professor at the Wharton School at the University of Pennsylvania. “The Fed has unlocked its emergency toolkit.”

But others said the market malfunction showed a fragility in the system resulting from some of the regulatory changes introduced in the wake of the 2008 financial crisis.

Lawmakers required banks to hold more capital in reserve, which protected them from most shocks. However, as transaction volumes have exploded over the past decade, the changes have also made banks risk averse. In some corners of the financial markets – such as the overnight “repo” market for interbank loans – the result in recent days has been a shortage of willing buyers, experts said.

And to cope, some say, the Fed needs to reinstate its crisis-fighting playbook from 2008.

“We just need a really bold response,” said Hal Scott, a Harvard Law School professor who heads the nonpartisan committee on capital markets regulation. “The spread of the virus is stopping the economies of these countries. Take Italy — the economic system is not working. We could be there.”

Trump criticized Powell for moving slowly in the face of falling markets and fears of recession linked to the coronavirus outbreak.

But along with the Fed, investors are looking to Congress — with growing desperation — for an aggressive response to the economic threat. “There has to be a fiscal response,” Posen said.

The Dow fell almost 1,700 points, but it was the S&P 500’s 7% drop that triggered the circuit breaker – a 15-minute pause to halt the free fall and give traders time to recalibrate. The cooling was temporary, however, as the blue chip index fell more than 2,200 points before rebounding slightly. By noon, it was down more than 1,800 points, or 7.8%, while the S&P 500 was down 7.2% and the tech-heavy Nasdaq was down nearly 7%.

The New York Stock Exchange activated rarely used leverage as the accelerating spread of the coronavirus and deteriorating economic outlook rocked global markets for weeks. Futures markets fell overnight after Trump announced the travel ban – a move that blindsided European officials.

On Monday, the S&P 500 triggered the first circuit breaker after falling 7% at the start of the session. By the end of the day, it was down 7.6% and the Dow Jones was down 2,014 points, or 7.8%. Markets rallied somewhat on Tuesday, posting broad-based gains, only to pull back on Wednesday after the World Health Organization declared the coronavirus a pandemic. The Dow Jones cratered nearly 1,500 points to fall into a bear market, marking a 20% drop from its all-time high.

Thursday’s drop was reminiscent of “Black Monday” in 1987, still the Dow’s biggest one-day drop in percentage terms. Shares fell 22.6% that day, with sell orders coming in so quickly they overwhelmed the New York Stock Exchange’s computer and telephone systems. It took two years for the market to regain lost ground.

The pneumonia-like disease has spread to every continent except Antarctica since it emerged in China late last year, sickening more than 120,000 people and killing thousands. The United States has more than 1,500 confirmed cases and 41 deaths.

The White House and Congress are at odds over what kind of economic bailout to assemble. The Trump administration has pushed the idea of ​​further tax cuts and delayed tax filings as a way to stimulate the economy, as well as expand sick leave benefits and help airline industries, hotels and cruises. Democrats are pushing ahead in the House of Representatives with a plan to expand unemployment insurance, provide more sick leave and ensure food benefits are available for people who lose their jobs and need of emergency assistance.

“With bad news for the travel, entertainment, leisure and energy industries stemming from virus fears, initial jobless claims are expected to rise soon,” Ed Yardeni, president of Yardeni Research, wrote in a comment Thursday. . “Measures of consumer and business confidence are also expected to fall rapidly. A recession is not inevitable, but it is certainly becoming more likely. ”

Before Thursday, the Dow closed a one-day session down at least 7% on 20 occasions since 1896, according to Howard Silverblatt of S&P Dow Jones Indices.