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Stocks were on track for a brutally lower open Monday, with stock-index futures down their daily 5% limit after investors failed to take comfort in the Federal Reserve’s decision to slash its benchmark interest rate to nearly 0% to combat the economic fallout from the coronavirus outbreak.
How are stocks performing?
Futures for the Dow Jones Industrial Average YMH20, -4.53% were trading 1,041 points, or 4.56%, at 21,798, while S&P 500 futures ESH20, -4.76% declined 128.40 points, or 4.78%, to 2,555.50, while Nasdaq-100 futures NQH20, -4.54% fell 350.75 points to reach 7,541, a decline of 4.55%. All three contracts were down by their daily trading limit of 5%, based on the volume-weighted average price in the final minute of regular trading the previous session.
However, exchange-traded funds that are indicative of how futures might perform were trading with even heavier losses. The SPDR Dow Jones Industrial Average ETF Trust DIA, +9.43% was down 9.9% in premarket trade, the SPDR S&P 500 ETF Trust SPY, +8.55% was off 9.6% lower and the Invesco QQQ Trust Series QQQ, +8.47%, which tracks the Nasdaq-100, was 8.7% lower.
Those declines indicated stocks could trigger a marketwide circuit breaker at the opening bell, which kicks in when the S&P 500 drops by 7%. At that point, stocks would see a 15 minute pause. A similar halt would occur if stocks fell by 13%.
On Friday, the Dow DJIA, +9.36% soared 1,985 points, or 9.4%, to settle at 26,79.16, while the S&P 500 SPX, +9.29% rose 230.38 points, or 9.3%, to close at 2,711.02. The Nasdaq Composite COMP, +9.35% gained 673.07 points, or 9.4%, to end at 7,874.88.
What’s driving the market?
The Fed’s rare Sunday evening rate cut has done little to encourage the buying mood on Wall Street that has been spooked by the rapid spread of the COVID-19 outbreak, which has infected about 170,000 people globally and claimed more than 6,500 lives, according to data compiled by Johns Hopkins University, as of Monday morning.
Beyond slashing the benchmark federal-funds rates, the Fed said it roll out a package of stimulus measures, including purchasing $700 billion in Treasurys and mortgage-backed securities, cutting the rate charged to banks for short-term emergency loans from its discount window and activating swap lines with the Bank of England, European Central Bank, Bank of Japan, Swiss National Bank and the Bank of Canada, plans it hasn’t enacted since the 2008 financial crisis. Still, U.S. dollar weakened against major rivals, as measured by the ICE U.S. Dollar Index DXY, -0.91%, which was down 0.8% Monday morning.
On Sunday, Fed Chairman Jerome Powell told reporters that plunging oil prices were a factor in the Fed’s decision, after Saudi Arabia and Russia got locked in a price war following a major disagreement between major oil producers who are a part of a group called OPEC+, consisting of members of the Organization of the Petroleum Exporting Countries and producers like Russia.
On Monday, West Texas Intermediate crude, the U.S. gauge of crude prices CLK20, -8.25%, breached a psychological level at $30 and was currently off 7.1% at $29.50 a barrel on the New York Mercantile Exchange.
Some observers argued that while the Fed’s moves were justified, the timing of the announcement ahead of the open of Asian markets late Sunday and in lieu of a policy meeting that had been sent for this week appeared to reflect panic.
“The radical measures have sent out a very worrying message to dealers, and that is why they are blindly dumping stocks,” wrote David Madden, market analyst at CMC Markets, in a Monday morning research note.
“It has been another brutal morning in the markets as traders are fearful the world economy is heading for a recession,” he said.
The uncertain nature of the spread of the illness and its unknown economic impact has been a key driver of market selling.
“The challenge for Powell arises if and when the market views the Sunday night emergency moves as not being enough, which is entirely possible given the unknown of liquidity challenges that lie ahead as news begins to trickle out on the true scope of COVID-19’s spread inside the United States,” wrote Danielle DiMartino Booth, CEO at boutique research firm Quill Intelligence.
