Breaking news: the US’ Federal Reserve just cut rates by 50 basis points in an emergency move.

 

We saw last week the U.S.’ S&P 500 Index market dropped 11-12% after a 2008-sized coronavirus driven weekly selloff. Overnight last night (Monday) we saw the U.S. stock market post the biggest one-day jump since 2009 as markets rejoiced over potential upcoming monetary stimulus by multiple central banks. The Dow Jones Index and S&P 500 Index rose 5.09% and 4.60% respectively on Monday.

 

What caused the market to rebound so much overnight?

 

There were 2 key reasons:

 

 

1) Investors are widely expecting the Fed to cut short-term interest rates by at least 50 to 75 basis points by April. This has been priced in for some time but added pressure has further built up lately. Recent comments by the European Central Bank (ECB)’s President Christine Lagarde, Bank of Japan’s Governor Haruhiko Kuroda and the U.S. Federal Reserve’s (Fed) Chairman Jerome Powell further fuelled expectations.

 

2) Bill Nelson, Chief Economist at the Bank Policy Institute (and a former Fed insider) wrote Monday Hong Kong time in his blog titled “Don't keep your powder dry” that he expects there to be a coordinated global interest rate cut to come Wednesday night Hong Kong time by the U.S.’ Federal Reserve (Fed) and 5 other key central banks. There will be “forward guidance” as well giving investors indication of future policy action.

 

Within Asian trading hours today (Tuesday) we already see both the Australian and the Malaysian central bank cutting 50 and 25 basis points respectively. Overnight we saw the Federal Reserve in an emergency move cut 50 basis points.

 

Does this mean everything is rosy ahead?

 

It’s not simple and as investors we should read a little deeper. There are a few key challenges we should be aware here:

 

 

(1) High expectations:

 

 

Investors are expecting a lot and likely this recent 4-5% jump in U.S. stock markets have already baked in an expectation of at least a 50 basis point cut. To drive markets further central banks will have to as Mr. Nelson said in his blog “deliver more than expected”. As we saw with the Federal Reserves' 50 basis point emergency cut, market reaction was pretty muted.
 

 

(2) Potentially trying to put a square peg in a round hole:

 

 

As mentioned in our last Market Insights even though we welcome stimulus by central banks and this may uplift financial markets in the short term monetary policies generally speaking aren’t designed to address viral outbreaks such as the coronavirus. Whether rate cuts (and additional monetary stimulus actions) can help uplift our market remains to be seen.
 

 

(3) Bond markets tell us another story:

 

 

Many investors were still trying to find protection on Monday. When looking at the U.S.’ 10-year treasury yield it slumped to a new record low on Monday of 1.036% which indicates that there was still high demand on safe-haven assets. Normally with how much stock markets rallied on Monday we should also see a sizable increase in treasury yields (since investors are leaving safe assets for riskier ones such as stocks). Rates rose up slightly since Monday now at 1.142% but we are still flirting with extremely low yield levels. This means investors likely aren’t sold yet. 

 

So what is the conclusion? 

 

 

The key risk here is if the upcoming stimulus underwhelms investors (or god forbid doesn’t happen) or it does little to reenergize markets during this coronavirus driven selloff. At this moment we are on the side of caution even though the market is in a semi-euphoric state while waiting for central bank stimulus. For investors make sure your portfolios are adequately diversified both from a region and asset level because there may be more volatility ahead. 

 

AQUMON’s ETF portfolios are extremely diversified and liquid and are designed to help investors better ride out volatile markets such as the one we are experiencing right now.


Thank you again for your continued support for AQUMON, stay safe outside and happy investing!

 

 

About us

As a leading startup in the FinTech space, AQUMON aims to make sophisticated investment advice cost-effective, transparent and accessible to both institutional and retail markets, via the adoptions of scalable technology platforms and automated investment algorithms.

AQUMON’s parent company Magnum Research Limited is licensed with Type 1, 4 and 9 under the Securities and Futures Commission of Hong Kong. In 2017, AQUMON became the first independent Robo Advisor to be accredited by the SFC.

AQUMON’s investors include Alibaba Entrepreneurs Fund, Bank of China International and HKUST.

 

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