Coronavirus: Three reasons why markets are expected to open with a crash, Fed helpless

Acting as appropriate – as Jerome Powell, Chairman of the Federal Reserve put it – may be far from sufficient. Perhaps the Fed is unable to do anything at this point to stop the crash in global markets in the wake of the worsening coronavirus outbreak. 

Powell took the extraordinary step –unseen since the crisis – to issue an unscheduled statement late on Friday. He said the US economy is in a good state but the bank is monitoring the epidemic and ready to act – a code word that the world's most powerful central bank will cut rates in its upcoming meeting. Some even suspect the Fed could slash borrowing costs in an emergency session ahead of its planned March 18 gathering. 

The news helped American equities bounce late on Friday after a horrendous week. However, here are three reasons why shares are likely to tumble down as trading kicks off in March. 

1) The Fed had limited power 

Powell has already reduced rates three times in 2019 – and not from a high point. The current Federal Funds Rate is at a range between 1.50% to 1.75%. While the Washington-based institution had more firepower than its peers in developed economies, its ammunition is in limited supply. 

Moreover, this is a health crisis, not a financial one like in 2008. The Fed has monetary tools but does not have the available medicine. Any financial shot in the arm would only slow the sell-off, but not turn the trend back up. 

2) China's economy has ground to a halt

The comparison to the Great Financial Crisis is ominous for the Chinese economy. According to Purchasing Managers' Indexes for February, both the manufacturing and the services sectors are collapsing more quickly than in 2008 – and these are official, government figures, often suspected for smoothing reality. 

Manufacturing PMI hit 35.7 points, far below around 45 expected, and services fell to 29.1, miles away from around 51 projected. That, on its own, does not bode well for the open in Asia. 

3) Coronavirus is spreading, the first death in the US

The illness continues making its way around the world also over the weekend. Washington state has confirmed the disease's first coronavirus-related mortality in America. As authorities ramp up testing, more cases are likely in the world's largest economy.

It is likely only a matter of time until the first infection is reported in New York, where the main stock markets are based. Attempts to stop the spread, such as cancelation of events and other means of social distancing may also raise fears of broad economic damage. 

Conclusion 

The Fed's outstanding effort to halt the carnage in markets is bound to fail amid its inherent inability, Chinese data, and the ongoing spread of coronavirus. 

Gold, the Japanese yen, and bonds are set to benefit from safe-haven flows

See March Madness: 5 critical (mostly) coronavirus-linked events to rock markets in the first week of March