Stock futures dropped sharply Sunday evening after the Federal Reserve surprised markets and cut short-term interest rates to zero and launched a fresh round of crisis-era bond purchases, an emergency move to combat the economic shocks from the coronavirus pandemic.
Dow futures tumbled 800 points after the central bank lowered the Fed’s benchmark federal funds rate by a full percentage point to a range of zero to 0.25%, a range it hovered at in the aftermath of the 2008 financial crisis.
“The market is likely taking this as a panic since the Fed couldn’t wait until their meeting on Wednesday to take action,” says Stephen Guilfoyle, founder and president of Sarge986 LLC, a family-run trading operation.
To be sure, Sunday’s dramatic action by the Fed could “significantly” reduce stress in the financial system, according to Mike Fratantoni, senior vice president and chief economist at the Mortgage Bankers Association.
“These actions will lower mortgage rates, helping homeowners save money through refinancing, and thereby providing a boost to the broader economy,” Fratantoni said in a note.
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Investors parsed fresh developments over the weekend from the fallout over the virus. More than 150,000 cases have been reported worldwide with almost 6,000 deaths. Almost 3,000 coronavirus cases have been confirmed in the U.S., with a death toll of more than 50.
Spain ordered a state of emergency Saturday and prepared to close all schools, universities, restaurants, bars and hotels nationwide. France ordered cafes, restaurant and cinemas to close. Meanwhile, Detroit Pistons forward Christian Wood tested positive for coronavirus, bringing the number of NBA players who tested positive to three.
Wall Street was still anxiously awaiting an aid package from Washington that investors hope can help cushion the economy from the slowdown in economic activity. Investors were also looking ahead to the Federal Reserve’s policy meeting this week.
“No one really believes that the Fed’s policy will be the only thing to help counter the difficulties we’re facing from this global supply shock,” says Thomas Martin, senior portfolio manager at Atlanta-based GLOBALT Investments. “What will help right now is government action where they make money available through fiscal policy so hourly people can pay their bills and businesses won’t go bankrupt.”
Shortly after midnight Friday, the House passed legislation to provide economic relief to Americans affected by coronavirus. Trump said Friday he would support the sweeping measure. The bill now heads to the Senate for an expected vote Monday.
Global stock markets have erased trillions in market value in recent weeks on heightened fears the world economy will slump into a recession. U.S. stocks have swiftly retreated from records set just a month ago, dropping by the most since the “Black Monday” stock market crash of 1987 and ending their historic 11-year bull market run.
Earlier this month the Federal Reserve took an emergency step and cut the benchmark rate by half a percentage point in an effort to limit the economic fallout from the virus.
Then the New York Federal Reserve took steps Thursday to inject more than $1.5 trillion into the markets to help calm investors who are fearful of the economic impact of the virus. On Friday, it said it would ramp up its Treasury bond purchases in a bid to help cushion the financial system.
Investors are looking ahead to guidance from world leaders this week for their potential economic and financial response. On Monday, leaders of the Group of Seven club of industrialized countries including the U.S., France, Italy, Britain, Canada, Japan and Germany are expected to talk by phone.