Central Banks Roll Out the Big Guns…ASX Plummets

This morning it looked like the ASX 200 might be able to repeat Friday’s miracle rebound.

On Friday, after falling more than 8% the index of the top 200 stocks finished the day up 4.4%.

The 13.7% rally from its intraday low is unprecedented. And it demonstrates the soaring level of uncertainty investors are grappling with.

Tody the index lost 7.0% during the first twenty minutes of trade, only to regain almost half those losses before lunchtime. But it was downhill from there. At 3pm AEDT the ASX 200 is down 7.5%. And futures in US markets are plumbing the basement.

One thing’s for sure. If equity markets do continue to trend lower over the coming weeks we won’t be able to blame the central banks.

They’ve come out with all guns blazing.

Across the Ditch the Reserve Bank of New Zealand slashed interest rates by 0.75%. That brings the Kiwi’s official rate to a rock bottom 0.25%.

The US Fed had a bit more room to cut. And they used it.

Yesterday, overnight our time, the Fed slashed rates by 1.0%. The official US rate now sits in the 0.00–0.25% target range.

And the Fed didn’t stop there. The bank also announced a fresh US$700 billion (AU$1.1 trillion) bond buying splurge.

As for RBA, its next official rate decision meeting isn’t until 7 April. But the rumour mill has it we can expect another cut well before then. Of course with the cash rate already at a record low 0.50%, a rate cut alone won’t deliver much of a kick.

QE is coming Down Under

Now all this easy money is meant to help businesses and consumers get through the worst economic fallout from the coronavirus closures. It’s not meant to be the new normal.

But that may not be the case. It’s always easier to open the money taps wide than to close them back down without crimping much needed economic growth.

Why should that concern you? Simple…

Most developed nations have been trying, and failing, to stoke inflation to their target levels for years now. But once this virus is contained and life returns to something like normal, the new wall of money unleashed by governments and central banks could see inflation take off.

That would usher in higher nominal interest rates, which would put a lot of indebted businesses and households under pressure.

That could mean any hoped for rapid rebounds following the containment of the coronavirus could be fleeting, at best.

 

PS: While most every stock has come under selling pressure in recent weeks, The Rum Rebellion editor Vern Gowdie lists five stocks he believes you should consider selling immediately. You can find out which ones, and why, in his free special report here.


Bernd Struben is an Editor of The Rum Rebellion. In this capacity, he has access to one of the most intriguing and powerful networks of practical investment insight anywhere in the world. Bernd has worked on four different continents, and has more than 20 years of professional finance, editorial, and management experience. He holds a degree in economics.


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