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Business News/ Markets / Mark To Market/  Fed bazooka backfires, as impact of Covid-19 is still an unknown

Fed bazooka backfires, as impact of Covid-19 is still an unknown

US Fed’s 100 basis points rate cut takes total cut to 150 bps in a fortnight, which is unprecedented
  • Trading on US bourses was halted as S&P 500 nosedived 7% as soon as the market opened
  • Jerome Powell, chairman of the US Federal Reserve. (Photo: Bloomberg)Premium
    Jerome Powell, chairman of the US Federal Reserve. (Photo: Bloomberg)

    Central banks are on a rate-cutting spree worldwide. But rather than reviving markets, it is sending them in the opposite direction. The Nifty 50 fell 7.6% on Monday, while trading in US stocks was halted briefly as soon as the market opened, after S&P 500 fell 7%.

    Late Sunday night, the US Federal Reserve cut bank rate by a steep 100 basis points, to zero. The latest cut comes within a fortnight of the previous one, taking the total cuts this year to 150 basis points, unprecedented in recent times.

    Investors are worried that central banks don’t have enough weapons left, even as the Covid-19 pandemic continues to rage. After a positive start at the beginning of the year to the US economy, the upheaval caused by the rapid escalation in the number of coronavirus infections has seen its business activity nosedive.

    Some analysts even fear that with the multiple shutdowns across the US, its economy is now heading into a recession. In fact, Goldman Sachs just lowered the first quarter GDP growth estimate for the US to zero from 0.7%. That may make the drastic rate cut look necessary, but the markets are unimpressed because rate cuts can’t offset the impact of the supply disruption on account of the spread of the novel coronavirus.

    Graphic by Naveen Kumar Saini/Mint
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    Graphic by Naveen Kumar Saini/Mint

    The Fed also announced an additional purchase of bonds, known as Quantitative Easing version 4.0, which promises to buy Treasuries worth $500 billion and mortgage-backed securities worth $200 billion in the coming months. This is being seen as an additional effort to stave off a financial crisis-like situation that gripped the economy during the financial crisis of 2008.

    Amid rising expectations that the Reserve Bank of India (RBI) would join global central banks in bringing down policy rates, the central bank stuck to liquidity measures on Monday. However, in a press conference later, the RBI governor was quick to say that no measure is off the table to deal with the virus impact on the economy.

    In a recent report, BofA Securities Ltd said, “There is a downside risk to our 4.3% March quarter growth forecast as shutdowns escalate to prevent the Covid-19 outbreak".

    The Indian market’s valuations have come off to about 14.7 times forward earnings for FY21, as per Bloomberg estimates. So, does that mean Indian stocks are undervalued?

    While financial yardsticks to measure valuation suggest that stocks have started to look inexpensive, the fact is that the market is unsure how much more damage the coronavirus will inflict before it is contained. Hence, choppiness will remain high.

    “One needs to keep in mind that volatility will continue for some time and we are not out of the woods yet as the number of cases of Covid-19 will keep escalating across the globe in coming weeks," said a recent Kotak Securities Ltd report.

    And with the only known way of slowing the virus spread for now being a clampdown on the movement of people, the impact on consumption and earnings can be severe.

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    Published: 16 Mar 2020, 12:24 PM IST
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