Stocks markets stronger, but off highs, after Fed rate cut

Stock markets were higher on Tuesday but off their peaks as traders considered the real-world impact of a surprise US rate cut aimed at shielding the economy from the impact of the spreading coronavirus.

Oil prices also rose, while the dollar weakened against its main rivals.

Central bank pledges of action had already boosted shares that were hammered last week as major global stock markets lost around 12 percent in value.

After an eagerly-awaited conference call of G7 finance ministers left traders and analysts disappointed, the US Federal Reserve cut its key interest rate by a half point to a range of 1.0-1.25 percent.

A Fed statement said “the coronavirus poses evolving risks to economic activity,” and the bank “is closely monitoring developments and their implications for the economic outlook”.

In New York, the Dow Jones index was a touch higher almost an hour after the Fed’s announcement, building on a huge gain of more than five percent the previous day, its biggest one-day percentage gain since 2009.

“The Fed has proved today that it is willing to do whatever it takes to keep the bull market alive,” AvaTrade analyst Naeem Aslam said.

The rate cut “has taken traders completely by surprise because no one was expecting this and especially this aggressive (a) move,” he added before concluding: “I think the flood gate is wide open.”

But analysts also noted that key indexes had pulled back from much stronger gains seen in their initial reaction.

James Knightley, Chief International Economist at ING, said there were question marks about how effective monetary easing was going to be.

“We doubt today’s policy action will trigger a meaningful boost to aggregate demand, but implementing rate cuts may help to mitigate some potential strains in the financial system and give a lift to sentiment,” he said.

On energy markets, the price of Brent crude was up in London exchanges, with dealers betting on major producers cutting output to address a predicted plunge in crude demand.

The dollar slipped against other major currencies as some traders quickly began to speculate about another Fed rate cut later this month.

Central banks from the US, Japan and Europe said they were ready to provide support with monetary easing such as interest rate cuts and cash injections to financial markets.

The Fed was the first top-tier central bank to act, but Australia and Malaysia had already cut borrowing costs earlier in the day, and Aslam at AvaTrade expected the Canadian central bank to follow suit.

The Bank of England will meanwhile “take all necessary steps” to support the UK economy from coronavirus fallout, said governor Mark Carney.

“The Bank of England’s role is to help UK businesses and households manage through an economic shock that could prove large but will ultimately be temporary,” Carney said.

The deadly outbreak has shaken economic activity, with an index of Chinese factory activity falling to a record low last month, while a US survey of manufacturers came in below forecast, with expectations of worse to come.

And with demand for crude tipped to take a battering — particularly from crucial consumer China — OPEC is to hold an extraordinary meeting on Thursday with other producers, led by Russia, to weigh its response.

The disease that began in China has killed more than 3,100 people and infected more than 91,000.

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