Asian shares held steady on Wednesday and bonds recorded stunning gains after an emergency rate cut from the United States Federal Reserve that seemed to stoke, rather than soothe, fears over the coronavirus‘ widening global economic fallout.
Wall Street futures appeared to have recovered after a sharp fall overnight, following the surprise half-percentage point cut that came with commentary by Federal Reserve Chair Jerome Powell highlighting the limits of monetary policy. Gold surged and the US dollar sank.
“With the Fed rate cut out of the way, it gives Asian central banks more room to cut rates,” Jeffrey Halley, senior market analyst for Asia Pacific at OANDA, told Al Jazeera.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.2 percent, though most of the gains were confined to South Korea where the government announced a big stimulus package.
After Wall Street tumbled overnight, futures for the S&P 500 rose 1.4 percent on the resurgent performance of former US Vice President Joe Biden in Democratic Party primaries. A moderate, Biden is now set up as the main challenger to self-described Democratic socialist Bernie Sanders.
European equity markets were slightly higher in early trade.
Currencies and bonds showed little such exuberance. The US dollar remained on the back foot and the yield on benchmark 10-year US Treasuries, which falls when prices rise, held at 0.9748 percent – not far over the once-unimaginable low of 0.9060 percent which hit overnight.
“US treasuries are moving even lower and credit spreads are widening in Asia today. That is not the usual effect that you would see from a move like this,” Rishi Jalan, Citigroup co-head of debt capital markets syndication, told the Reuters news agency.
“This decision shows the coronavirus impact is real and could have a material impact on growth. For market participants, it shows a thinking of ‘The Fed is expecting something that we have not yet priced in’.”
Japan’s Nikkei closed flat, while Australia’s S&P/ASX 200 fell by 1.7 percent. Stocks in Hong Kong slipped 0.24 percent and China inched up 0.15 percent.
Korean stocks bucked the broader weakness in Asian equity markets, rising 2 percent after the government announced a $9.8bn stimulus package to mitigate the effect of the virus outbreak.
The US dollar touched a five-month low against the safe-haven Japanese yen and slipped against most other Asian currencies.
“Given the way that the market’s reacted, it’s telling you that there’s a little bit of panic,” said Andrew Gillan, head of Asia ex-Japan equities at Janus Henderson in Singapore.
“They’re a bit worried that interest rate cuts are not going to make a massive difference… and what’s going to be required is probably going to be more fiscal stimulus,” he said, his fund having invested, for example, in Chinese cement and construction stocks in anticipation of more government support measures.
The Federal Reserve’s surprise move followed a significant shift in money-market pricing late last week.
Futures swung rapidly to expect such a cut at the Federal Reserve’s March meeting.
Now they imply another 50 basis points of easing by July, even as the investors and the Federal Reserve itself raise questions about the efficacy of easing to deal with a public health crisis.
“We do recognise that a rate cut will not reduce the rate of infection, it won’t fix a broken supply chain; we get that,” Federal Reserve Chairman Jerome Powell told reporters at a news conference.
More than 3,000 people have been killed by the coronavirus, about 3.4 percent of those infected – far above seasonal flu’s death rate of less than 1 percent.
It continues to spread quickly beyond the epicentre in China, with Italy overnight reporting a jump in deaths to 79 and South Korea reporting more than 500 new cases on Wednesday.
“The question here is whether a conventional interest rate response is sufficient,” said Sameer Goel, chief strategist, Asia Macro, at Deutsche Bank in Singapore.
“It’s still not clear how big the problem ultimately is, or could be, and until you know that, it’s hard to know how much medicine to apply to it.”
In currencies, the US dollar clawed back some of its losses on the euro and yen, but was broadly on the back foot.
It last traded at $0.6596 per Australian dollar and $1.1160 per euro. After falling to as low as 106.84 yen, the dollar pared losses to buy 107.42 yen by midafternoon .
Oil prices firmed on expectations of production cuts, with Brent rising 90 cents to $52.79 per barrel and US crude up 1.9 percent at $48.06 a barrel.
Gold rose 0.2 percent to $1642.21 an ounce.