While the most recent changes in the potential outcome of the U.S. election have boosted sentiment, the latest on the all-important coronavirus is driving risk appetite down. And so are moves made by central banks around the globe.
Thursday, all three major U.S. indexes fell, with the S&P 500 falling more than 2.6%. Investors continued their rush into safety, buying up 10 year treasury bonds, sending the yield back down below 1%.
This comes just days after the Federal Reserve successfully un-inverted the yield curve — the 3 month yield is below 0.8% — by cutting rates. But the 50 basis point cut before the bank’s March meeting sparked fear that the U.S. economy is more at risk from the virus than previously thought.
The same dynamic seems to be true across the globe.
”It is clear, investors around the world now believe that the monetary policy alone cannot tackle another financial crisis, given that the starting point for interest rates is already extremely low and rock-bottom interest rates prove to be increasingly inefficient to fuel investment,” wrote Ipek Ozkardeskaya, senior analyst at Swissquote Bank in emailed remarks to reporters.
She noted that the governor of the Bank of England said that knowledge of how lower rates are flowing through economies is currently more important than lowering rates.
The Bank of Canada also cut interest rates by 50 basis points.
Many have also noted that low rates can’t get manufacturing plants up and running or consumers out of their houses if the issue is fear of getting sick. The cuts are to stabilize financial conditions and ease the cost of borrowing for the next 6 to 12 months.
If the U.S. soon must go towards negative rates, the jury is still out on whether negative interest rates help the real economy,” wrote Nigel Green, CEO of the deVere Group.
Investors are looking to fiscal policy in the EU and U.S. to aid growth, although the U.S. political election doesn’t exactly promise stimulus in that form.
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