Surprise Fed rate cut gives the rand a much-needed boost

The US Federal Reserve building in Washington, DC. The Fed kept the benchmark interest rate unchanged after increasing in March. (File pic: Karen Bleier, AFP)
The US Federal Reserve building in Washington, DC. The Fed kept the benchmark interest rate unchanged after increasing in March. (File pic: Karen Bleier, AFP)

Wall Street stocks gyrated on Tuesday after the Federal Reserve announced a large interest rate cut to counter the risk of recession due to the coronavirus.

By early evening South Africa time, the Dow Jones Industrial Average was slightly in the red, while the S&P 500 and the tech-rich Nasdaq Composite Index edged higher. 

Fed slashed its key interest rate by a half point to a range of 1.0% to 1.25%, a bigger cut than usual. This gave the rand - which now offers a much more attractive interest rate compared to the dollar - a bit of a boost. It was trading at R15.35/$ on Tuesday evening, from around R15.60 earlier in the day.

While US economic fundamentals "remain strong," the "coronavirus poses evolving risks to economic activity," the Federal Open Market Committee said in a statement.

Markets initially welcomed the action, pushing major indices solidly into positive territory just after the announcement.

But investors quickly began to second-guess the emergency step, questioning whether it meant the US economy is more vulnerable than previously thought.

"The Fed's hand was forced by the market, but it's really not a cure-all," said analyst Patrick O'Hare.

The US central bank action marked a sudden shift in stance after previously characterising the virus as a worry, but not an imminent threat to growth, and signaling that any action would be taken at the Fed's normally scheduled meeting March 18.

"It does send a message that things are going to potentially get much worse," O'Hare said.

The market's twists and turns come amid a volatile period that saw US indices suffer their worst week of losses last week, which was followed on Monday by a rally that lifted the Dow by 5.1%.

Across the world, 3 127 people have died from the new virus, with most cases in China and large clusters in South Korea, Iran and Italy and increasing instances of the ailment in the United States.

Oxford Economics lowered its 2020 US growth estimates from 1.7% to 1.3%, citing the hit from curtailed travel, less consumer activity and disruption to supply chains.

"While our baseline doesn't feature a lockdown scenario, we note that if authorities decide to close schools, severely restrict travel and limit all nonessential movement, the US economy will fall into a recession - with zero GDP growth in 2020 - putting an end to the longest economic expansion ever," said Oxford Economics.

South African rally

The JSE's all share index ended the day more than 2% higher, building on further gains from Monday.

The gold price jumped more than 2% to $1 636/oz, while AngloGold rose 7.5% and Amplats gained 6%. 

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