A Fed Suprise
The global coronavirus has continued to spread, and to spread rapidly. New cases in Italy, Iran and the U.S. have recently fueled a large degree of risk aversion that drove stocks to their worst weekly performance last week since the 2008 financial crisis. This week got off to a much better start, however, as the benchmark Dow Jones Industrial Average rose by over 1200 points Monday.
On Tuesday, the U.S. Fed took markets by surprise, cutting the key interest rate by a half percentage point in between policy meetings. The Fed cut comes on the heels of a cut by the Central Bank of Australia, which took its key interest rate to an all-time low of .5 percent. The Aussie central bank took the step in order to combat the increasing global economic slowdown from the coronavirus, with more central banks likely to follow suit in the days and weeks ahead.
The U.S. Fed acted aggressively by cutting rates a full half-point rather than a quarter-point. This move initially fueled higher stock prices. Those highs didn’t last long, however, and equity markets are now sharply lower in mid-day trade. The benchmark Dow Jones is now down nearly 450 points on the session for a decline of 1.67 percent. The Fed’s actions, while intended to boost the economy and to soothe investors, could end up having the opposite effect. The fact that the central bank felt the need to act, and to do so now, could give investors the sense that the Fed felt it couldn’t afford to wait. The stock market reaction is thus far bearish, and more selling could be seen before a bottom for stocks is finally found.
The gold market, on the other hand, is taking the news with a bullish sense of optimism. The yellow metal is now up over $55 per ounce on the day as the market has effectively erased all of Friday’s declines. The metal is now approaching the $1700 level, and if reached, the next major move higher could see a test of previous all-time highs around $2000 per ounce.
In another potential sign of economic distress, the benchmark 10-year note yield hit a fresh all-time low today of 1.023 percent. The extremely low yield would seem to suggest that investors are more concerned about safety than returns and are willing to park cash for a very paltry return in order to keep it safe.
Also assisting gold today is higher crude oil prices and a weaker dollar index. Crude oil has moved up towards the $47 region, while the dollar index is now trading at a multi-week low. Weaker stocks, along with a declining dollar, could hold the keys to fresh all-time highs in gold in the weeks and months ahead. The ongoing string of easing central banks may also provide some additional lift for the yellow metal as well and increasing risk aversion could keep a strong bid in the gold market for the foreseeable future.