S&P 500 lower despite record support from the Federal Reserve


Staff member
After the interest rate cuts that have already been made and the support measures that have already been announced in recent days, the Federal Reserve has made an effort today not to leave any questions unanswered by taking out its bazooka. For as of today, the Fed is available for "unlimited" purchases of US Treasuries and mortgage-backed securities. The purchases are expected to amount to over 125 billion US dollars a day and will last as long as necessary. The additional purchases will also have been necessary because of the fact that of the originally announced 700 billion US dollars, over 500 billion US dollars have already been used for purchases of Treasuries alone within the first week.

In the short term, the announcement helped stocks, but only for a very short time. The S&P 500 quickly turned down again. It is currently trading almost 3% lower at 2,240 points. The effect in EUR/USD did not last long either: In a first reaction the new Fed measures finally led to sales of the US dollar, so that the exchange rate jumped from $1.0680 by more than a "big figure" to over $1.08. But in the meantime this effect has partly evaporated again. EUR/USD currently stands at $1.0730, not much higher than before the weekend. The danger of a strong dollar for USD-denominated companies and emerging markets thus remains for the time being.

The fact that the Fed is losing its impact on the market so quickly with its own "whatever it takes" moment is certainly not a good sign.
On the one hand, market participants have probably interpreted the big bazooka in the sense that the economic outlook in America and the rest of the world must be catastrophic. On the other hand, it is still questionable to what extent central banks can help in this particular crisis without substantial backing from their respective governments. Although Congress in the United States is working under high pressure to rescue the local economy, the country's president remains a wild card that has not yet cut a good figure in a crisis situation. It remains to be hoped whether the two fragmented parties in the United States will be able to put their differences aside in order to achieve the best possible outcome for their country in the fight against corona. After all, with its unlimited bond purchases the Fed is also making it clear that Congress will have no problem in ultimately financing the aid measures it has decided on, which according to current estimates could amount to USD 2 trillion. After all, it is primarily the Fed that will buy the US Treasuries and thus provide the necessary money.

That such gigantic asset purchases would come was perhaps already apparent shortly before the weekend. At that time James Bullard of the St. Louis Fed had expressed his opinion that unemployment in the US could rise to an alarming 30% as a result of the corona crisis and that GDP could be halved. No matter how great the economic distortions may ultimately be, by now no one doubts that we are threatened with a global economic crisis unless the spread of the virus can be slowed down by disciplined action on the part of the population and unless all the economies of the world act in a coordinated manner to support the global economy as much as possible.

With regard to the foreign exchange market, it is certainly difficult to bet against a central bank as powerful as the Fed. But given the rapidly fading effect of the new QE programme and the continuing need for US dollar liquidity, I remain cautiously constructive for the strength of the US dollar as the global trading currency.