Fed cuts interest rates

The US Federal Reserve cut interest rates by 50 bps in an emergency move to bring the lower bound of the rate to 1.0%. It was the first inter-meeting change in rates since the 2008 financial crisis. In addition to the reduction in the benchmark rate, the Fed also announced a 50 bps cut on the interest it pays on excess bank reserves. The Fed Chairman Jerome Powell said that the central bank took action after officials saw that the coronavirus outbreak was having a material impact on the economic outlook. Further, he added that the Federal Reserve is in active talks with other central banks and also reiterated that it remains ready to act further should the situation warrant.

Before the Federal Reserve action, G7 countries issued a statement where they affirmed their commitment to ‘use all appropriate policy tools to achieve strong and sustainable growth and safeguard against downside risks’. The teleconference was attended by G7 finance ministers and respective central bank governors.

Australia’s GDP data for Q4 2019 came in at 0.5% q/q and 2.2% y/y. This was stronger than expected and indicative that the economy had momentum heading into Q1 2020 where it has faced headwinds from wildfires and the coronavirus outbreak.

The UAE’s headline PMI slipped further in February to 49.1, the second consecutive sub-50 reading.  All components of the headline index softened last month as businesses started to grapple with the impact of the coronavirus on supply chains and demand.  Output declined for the first time since January 2010, while new orders fell for the second month in a row. Saudi Arabia’s non-oil sector growth slowed in February, but the PMI remained in expansion territory at 52.5.  Output and new work increased, but at a markedly slower rate, with new order growth the softest in nearly two years. Egypt’s headline PMI figure improved to 47.1 in February, up from a near three-year low of 46.0 in January. Nevertheless, this remains far off the neutral 50.0 level, and is below the series average of 48.4, suggesting that the long-awaited recovery in the non-oil private sector remains beyond the horizon.

Federal Reserve cuts interest rates

Source: Bloomberg

Fixed Income

Treasuries rallied sharply higher following a 50 bps rate cut by the Federal Reserve. Gains were led by the front-end of the curve as the swap market priced in a further 50 bps cut by June 2020. Yields on the 2y USTs and 10y USTs ended the day at 0.70% (-20 bps) and 0.99% (-17 bps). Yields on 10y USTs closed below 1% for the first time.

Regional bonds continue to benefit from sharp moves in benchmark yields. The YTW on Bloomberg Barclays GCC Credit and High Yield index dropped 7 bps to 288 bps and credit spreads remained flat at 189 bps.

Regional central banks in the UAE, Bahrain and the Kingdom of Saudi Arabia matched the rate cut made by the Federal Reserve and reduced interest rates by 50 bps.

Elsewhere, S&P became the latest rating agency to lower NMC’s rating to CCC- and kept it on negative watch for further downgrades.

FX

The dollar softened in the wake of the Fed’s decision to cut interest rates rising to 1.1212 against the EUR. However, the losses were shortlived and the USD recovered gradually overnight back to 1.1160. USDJPY meanwhile fell briefly below 107 before subsequently recovering back above 107. While G7 ministers pledged to ‘use all appropriate tools’ to safeguard growth, so far only Australia has matched the Fed’s move with the RBA cutting interest rates by 25 basis points to a record low of 0.5%, making this the fourth time that the RBA has cut interest rates within the past year. While GBPUSD rallied on the back of the Fed’s rate move, its strength was also reinforced by news that UK Construction PMI data was better than expected at 52.6, up from 48.4 in January.

Equities

Developed market equities closed mixed as investors assessed the emergency rate cut by the Federal Reserve. In a rather volatile trading session, the S&P 500 index dropped -2.8% while the Euro Stoxx 600 index added +1.4%. The fall in US equities needs to seen in the context of a 5% gain in the previous trading session.

Regional equities closed largely higher. The Tadawul and the KWSE PM index added +2.8% and +2.3% respectively. Gains were primarily led by banking sector stocks with Al Rajhi Bank and National Bank of Kuwait adding +3.4% each.

Commodities

Oil prices are testing higher in early trading today as the market waits on whether OPEC+ will follow through with production cuts at its meeting later this week. Brent is up at USD 52.74/b, a gain of 1.7%, while WTI is 1.6% higher at USD 47.96/b. OPEC’s joint technical committee has revised up its recommendation for a production cut for up to 1m b/d, compared with 600k b/d previously, suggesting the drop in demand is much worse than they had expected earlier. With the market primed for at least a 1m b/d cut, any shortfall on that measure could see selling pressure resume.

Gold surged higher, up to USD 1,641/troy oz, on the US Federal Reserve’s emergency 50bps rate cut. While a cut was largely expected by the markets, the fact that it came earlier and bigger than expected sent a shock through risk assets as markets worry that the extent of Covid19 may be worse than anticipated. 

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