The Federal Reserve threw the kitchen sink at the problem caused by the coronavirus outbreak today and although the markets initially welcomed the news, the gains have since evaporated. The market’s reaction should not come as a surprise given that we have seen similar responses to other stimulus packages announced by central banks and governments previously. The problem is that the Fed is addressing the supply of credit, whereas the problem is demand – or lack thereof – by households and businesses as the global economy shuts down. Market participants are preparing for the worst-case scenario and clearly speculate that there will be a massive slowdown in the global economy and a spike in unemployment. What makes this even worse is that no one knows how bad it will all get before things improve. Against this backdrop, any relief rallies are likely to be sold, until the spread of the virus slows down.
Earlier today, the Federal Reserve said it has committed to unlimited purchases of US Treasuries and most mortgage-backed securities. The central bank also announced it will buy corporate debt for the first time, all in an effort to support the economy and shore up struggling companies. Meanwhile, the US government is planning on a $2 trillion package of fiscal stimulus. However, friction remain between Democrats and Republicans over the terms of the package.
With the S&P making lower lows and lower highs, the path of least resistance continues to remains to the downside. As such, I expect to see a new low beneath 2186, possibly as early as later today. Further downside targets are the Fibonacci extension levels shown on the chart at 2128 (127.2%) and 2055 (161.8%).
