Markets plunged Monday morning, entirely erasing last week's short rally, as the chaos from the coronavirus epidemic continued to hammer the global economy.
Bloomberg reported that the S&P 500 dropped by 8 percent at opening, tripping the market circuit breakers and halting trade. While activity has since resumed, the index was stlll down by 7.4 pecent as of late Monday morning. The Dow Jones, meanwhile, was down by 30 percent from its previous high, falling by 9.7 percent until it too tripped the circuit breaker and briefly halted trades. Treasury yields are also cratering, as more and more people flee to safety, pushing rates down. In addition, the oil market has continued to sink, perhaps because of further chaos on the bond market, which has also awoken to an ugly Monday morning.
These sharp declines occurred despite recent moves by the Federal Reserve to calm the markets and blunt the economic damage. The central bank on Sunday announced it would be cutting interest rates to near zero, buying up $500 billion in U.S. Treasury bonds and $200 billion in mortgage-backed securities, lowered the dollar swap rate to encourage lending internationally, and making it easier to for banks to directly borrow from the Fed.
Yet these moves, reminiscent of what the Fed did during the financial crisis, did not inspire much confidence from the market. While the central bank's actions were meant to project confidence, traders have interpreted them instead as sign of fear, as it now appears that the Fed is running out of tools. Others are skeptical that even these actions will be enough, either due to the lack of corresponding fiscal action or the fact that a health crisis can be managed only to a limited extent through monetary policy.
Credit markets, meanwhile, continue to get weird: The Wall Street Journal reports that more companies are drawing on all or most of their revolving credit lines, which, in normal times, are meant to be accessed a little at a time. Last week, aeronautics firms Boeing and AerCap both announced plans to draw down all–or almost all—of their available bank credit, while hotel chains Hilton and Wynn Resorts have reported drawing down not all, but a still larger than normal amount. Adding to that, the Journal reported, were similar announcements from Micron Technology and Penn National Gaming. Anticipating a need for additional capital, major banks have slowed down the rate of share buybacks in order to ensure they have enough money to lend should more clients follow these example.
Share buybacks became ubiquitous as a consequence of the easy money environment that has been in place for the better part of a decade, according to the International Monetary Fund. As of this past summer, half of all share buybacks have been financed with debt.
The White House, meanwhile, after having spent much time rolling back the Dodd-Frank reforms set in place after the 2008 financial crisis, is reportedly now seeking to reinstate some of those same measures to respond to the financial instability, although the New York Times said that Treasury Secretary Steven Mnuchin was not specific as to what specific measures Treasury is looking to revive. Meanwhile, he also said that he would allow businesses to use funds deposited with the IRS to fund paid sick leave for employees in order to help comply with new requirements being proposed by a recent House bill.