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Futures on the stock market sink after the Fed's emergency rate cut if it doesn't work, what will it do?

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US stock index futures fell sharply on Sunday night following the Federal Reserve's emergency decision to bring interest rates down to near zero and buy $ 700 billion. dollars of treasury bills and mortgage-backed securities to calm the turmoil in the financial markets caused by the global coronavirus pandemic.

Lily:The Fed, not waiting for the meeting, cuts rates to zero and restarts QE

The Fed has devoted most of its weight to this move, offering almost everything it has to give, which begs the inevitable question if it doesn't work, what will it do? said Seema Shah, chief strategist at Principal Global Investors. The immediate negative reaction suggests that markets are already worried about it, and governments are likely to need to step up their fiscal action.

See:The Fed has just declared its own national emergency when it aims to protect the economy of the coronavirus

Stock index futures opened significantly lower on Sunday evening, quickly extending losses to lower the daily limit by 5%. Dow Jones Industrial Average Futures
YM00,
-4.55%

down 1,042 points to 21,798, while futures on the S&P 500
ES00,
-4.78%

lost 128.40 points to 2,555.50.

Prices for treasury bills have risen, driving yields down. 10-year Treasury bill yield
TMUBMUSD10Y,
0.686%

fell 30.5 basis points to 0.644%, according to FactSet data.

The US dollar weakened against its main rivals after the monetary actions of the federal government. In addition, as part of the Sunday action, the Fed and five other major central banks announced that they were activating swap lines in an effort to fill the dollar shortages caused by a global rush on the motto last week.

Some observers have argued that if federal government action is warranted, the timing of the announcement before the opening of Asian markets on Sunday evening and instead of a political meeting that had been sent for this week seemed hopeless.

When you have people in power who act in a very panicky way, who have extra-curricular meetings and who put everything they can on the situation, that does not send a very reassuring signal to the general population. said Max Gokhman, head of asset allocation at Pacific Life Fund Advisors, in an interview.

Shares fell sharply on volatile trades last week, with major indices
SPX,
+ 9.28%

DJIA,
+ 9.36%

COMP,
+ 9.34%

posting their fastest fall from all-time highs to a bear market defined as a 20% decline from a recent record high. Highlighting volatility, stocks experienced the largest one-day decline on Thursday since the October 1987 market crash, then rebounded significantly higher on Friday for the largest one-day gain since 2008 .

At the same time, tensions arose in the Treasury bill market, prompting the Fed last week to take steps to increase liquidity to keep it running smoothly. Fluctuations in the treasury bill market last week saw the usual market correlations collapse, compounding the nervousness of the financial markets.

The resumption by the New York Fed of treasury purchases late last week was a first step to help ease tensions in the treasury market. Today’s announcement by the federal government to buy an additional $ 500 billion in treasury bills is expected to ultimately restore liquidity and a healthy Treasury market, said Joachim Fels, advisor global economy at PIMCO, in a note Sunday evening.

See: It was the upheavals in the US treasury bill market that forced the Fed to step up support for Wall Street

Shah executives agreed that fears of liquidity and funding that contributed to market tensions last week justified the size and scope of the bond buying program. Another big problem in the box will be coordinating the world central bank to provide dollar funding, she said.

As the effects of the epidemic grow in Europe and the United States, investors are unlikely to find lasting comfort until the uncertainty begins to decrease, analysts say.

Central banks have played their role in recent weeks, it is now up to global policymakers, the G-7 or G-20, to take large-scale fiscal measures in the weeks and months to come to supplement these measures. said Michael Hewson, chief market analyst at CMC Markets UK, in a note.

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