Investments  

Update: S&P drops 10% shortly after opening

Update: S&P drops 10% shortly after opening
 Federal Reserve chairman Jay Powell

US indices slumped another 10 per cent this afternoon despite the Federal Reserve cutting interest rates and announcing a $700bn war-chest yesterday evening.

The S&P 500 fell 9.5 per cent once markets opened at 13:30 GMT — causing Wall Street to be suspended, as indices broke the 7 per cent threshold at which so-called circuit breakers are automatically triggered.

This is the third time such a suspension has happened in six days. Indices subsequently recovered slightly but the S&P remained 7 per cent lower as of 16:00 GMT. 

Yesterday a statement from the Fed’s Open Market Committee announced US interest rates would be cut by a full percentage point to a range of 0-0.25 per cent — the lowest since 2015 — in a bid to help economic activity and market conditions against the growing coronavirus crisis.

It also announced a $700bn (£566bn) war-chest for a series of asset purchases, with at least $500bn (£400bn) of Treasuries and $200bn (£160bn) of mortgage securities targeted. 

The committee said this would “support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities that are central to the flow of credit to households and businesses”.

Experts, and markets, were sceptical that the stimulus will be enough to stop stocks from falling.

The FTSE 100 has tumbled 6 per cent today while the Euro Stoxx 50 is down 8 per cent, but these markets are also reacting to the news of more widespread travel bans and rising case numbers across Europe.

Russ Mould, AJ Bell investment director, said: “There can be no denying the Fed’s commitment to action but its dramatic move will initially stoke further debate as to whether the monetary medicine will work, on the economy or markets or both.

“The Fed will be hoping that its new policy move, which will take total assets on its balance sheet above the $5trn (£4trn) mark, will offer support to the economy and get a warmer reception from financial markets.”

Edward Park, deputy chief investment officer at Brooks Macdonald, said monetary policy alone would not be sufficient to combat the effects of the virus given the current crisis was “inherently not a financial problem”.

Mr Park said the Fed’s decisive monetary policy response would likely supercharge the economic recovery when it came but in and of itself was unlikely to prevent a strong fall in economic activity in the first half of 2020.

The Fed stated: “The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected.

“The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals.”

The move is a strong shift from Fed activity two years ago. In mid-2018 rates were rising and quantitative easing was being tapered. The Fed has now made two unscheduled cuts in the past two weeks.