March 23, 2020 / 2:22 PM / 13 days ago

Instant View: Fed launches unprecedented range of credit support

NEW YORK (Reuters) - The S&P 500 .SPX opened lower, reversing a brief bounce in U.S. stock futures after the U.S. Federal Reserve on Monday said it would backstop an unprecedented range of credit for households, small businesses and major employers to offset the "tremendous hardship," caused by coronavirus.

FILE PHOTO: Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 19, 2019. REUTERS/Leah Millis/File Photo

The Fed said in a statement the effort was taken because “it has become clear that our economy will face severe disruptions.”

DAVID JOY, CHIEF MARKET STRATEGIST, AMERIPRISE, BOSTON

“What the Fed is doing is probably a necessary but, by itself, insufficient precondition to addressing the impact of the coronavirus. The Fed wants to unclog the credit spigot and eliminate illiquidity as a contributing factor to the coming slowdown. Part of that is simply generating confidence that money will be available. But that does not and cannot address the healthcare aspect of this, nor can it address the economic impact of social distancing and stay-at-home directives. Congress also needs to act and buy time for the crisis to stabilize and the economy to restart.”

MICHAEL SKORDELES, U.S. MACRO STRATEGIST, TRUIST/SUNTRUST ADVISORY SERVICES, ATLANTA

On why stocks went lower: “There are some cross-currents offsetting or overwhelming (the Fed). A lot of companies are cutting estimates this morning. The epidemic is getting worse. The recession talk is getting worse, including the St. Louis Fed president (on Sunday) saying unemployment could be 30%. There’s disappointment that Congress didn’t get something done on Sunday. You can pick out of a hat 15 different reasons why people are selling. We had a crummy last week, so there are also people saying, ‘Oh, there’s some strength. I’m going to sell into strength.’”

“We are in unprecedented, uncharted waters. There’s so many dislocations with corporate bonds and muni bonds, and that impacts a lot of companies and state governments, county governments and municipal governments. If you don’t have the right credit, and you’re dependent on the bond market to provide that, you’re going to have to lay people off. In the case of a county or city that’s dependent on sales tax, well, you just shut everything down…Unlike Uncle Sam, they can’t deficit spend.”

“There’s been a selling of things that people don’t necessarily want to but have to, because they can at least get some bid for it. What (the Fed is) doing here is a huge step to address the fear dislocations in the corporate and muni bond markets. They’re trying to make sure markets are operating properly.”

“I hear some folks talking about, ‘They’re going back to the Great Financial Crisis play-book.’ They’re way above and beyond the Great Financial Crisis play-book. They did not take these sorts of steps before. They’re doing it now. They’ve gone in the appropriate step of saying they’re not just opening the door to buying individual corporate bonds, but they’re also buying eligible exchange-traded funds. A lot of bond buyers use ETFs. They’re some of the largest holders of individual corporate bonds.”

STEVE CHIVALROUSNESS, PORTFOLIO MANAGER AND EQUITY STRATEGIST, FEDERATED HERMES, NEW YORK

“The Fed is proving that it can and will do anything in its power to support the economy. Some of the measures announced today in addition to what’s likely to come from the fiscal side takes the Armageddon scenario off the table. In order to get to a depression-like environment you need policy makers who don’t have the ability or the will to fight and the Fed is showing that we aren’t in that situation. A U-shaped recovery is still the most likely outcome now. We’re not all going to go back to work in one week and pretend this never happened, but this is taking the worst-case scenario off the table. This doesn’t mean that the market is going to bottom here because there is still stress in the credit market and we need fiscal authorities to hold up their end of the bargain. But all things being equal the Fed is flexing its muscles here and that should be a big comfort to everyone from a markets and an economics perspective.”

PAUL NOLTE, PORTFOLIO MANAGER, KINGSVIEW INVESTMENT MANAGEMENT, CHICAGO

“I’m hoping this opens up the spigots a little bit and makes it a little bit easier to transact business. I’m hearing just complete freeze-ups in the market. It’s going to take a little bit of time to see how this works out and how this gets implemented, but that’s certainly the hope. That’s part of the reason why the market is reacting so positively. They realize this is hopefully going to help the plumbing. Investors are looking for liquidity for cash... The bond funds and ETFs, you’re seeing just in the performance numbers, they’re 30% down.”

ANDREW RICHMAN, MANAGING DIRECTOR OF FIXED INCOME AT TRUIST/SUNTRUST ADVISORY SERVICES, JUPITER, FLORIDA

“Well, the Fed is not out of bazookas.

“I think (the Fed’s move) was necessary. We’ve had dislocations across all markets here. The economy is virtually shut down and the Fed is taking out whatever they can from their playbook.  Also the corporate bond market was not functioning the way it should and they’re stepping in.

“This is an unprecedented time period and they’re breaking out tools not used in the ‘08-09 crisis. I think it’s a positive step.”

STAN SHIPLEY, FIXED INCOME STRATEGIST, EVERCORE ISI, NEW YORK

“The Fed made it very clear that the financial system is not going to have a freeze-up like in 2007 and 2008. They’re going to buy almost every debt instrument asset out there that will prevent this. As a consequence, their balance sheet in one week is going to rise the same or more than we witnessed in QE 2. They will have a big balance sheet. Get ready for it. But the financial system is not going to fail. Ultimately you still have the risk that as you shut down 40% of the economy and more going down everyday, this cannot go on forever. But this provides several months of room for us to win the battle against the virus.”

MATT FABIAN, PARTNER, MUNICIPAL MARKET ANALYTICS

“The MMLF piece is much bigger; (it) will help the underlying short term market return to order while the money market funds pay all these investor withdrawals. The CPFF I hadn’t heard about. There isn’t much muni CP out there.

CRAIG ERLAM, SENIOR MARKET ANALYST, OANDA EUROPE (NOTE TO CLIENTS)

“US futures are bouncing back strongly after the Fed went all in on Monday, announcing unlimited, open-ended QE among numerous other measures to support the economy and markets.

“We’ve gone from limit-down into the green and could soon be limit-up, all before the opening bell on Wall Street. Safe to say, the chaos of the last few weeks is going nowhere and the way this week has started, it could feasibly be the most remarkable week of the lot.

“There’s no doubting that the Fed is doing everything within its power to see the economy through this period of unbelievable turmoil. The coronavirus has wreaked havoc global and ground the economy to a halt forcing drastic action from the fiscal and monetary authorities. It’s time for Congress to get its act together as well.”

RUSSELL PRICE, CHIEF ECONOMIST, AMERIPRISE FINANCIAL SERVICES, TROY, MICHIGAN

“It’s their bazooka moment. It’s their we’ll do whatever it takes moment which should be a sign to financial markets and investors that the Fed will provide any and all liquidity necessary to support the economy through this period.”

“The provision of liquidity is the most important function over the near term to make sure businesses that need it have it and that the financial system is functioning properly.”

“Futures overnight were so low primarily because of the failure to pass the stimulus package in Congress. That will eventually come. But in the mean time this is what’s needed here and now. The stimulus package will play its most important role over the weeks and months to come.”

“A lot of people in the market already perceived it was the Fed’s position. To come right out and say it publicly I think is an added step that provides additional comfort.”

“They’re using all the tools in their book and that’s what they’re going to do. If there’s anything else that comes up that’s something they did not expect they’ll use their unlimited power to make sure that the functionality remains in place as well. Later today we’ll probably also see progress on congressional negotiations.”

“But quite frankly the market is just in a waiting period right now until the virus runs its course and some of the therapies and other treatments are able to improve outcomes. Until we get that, and that’s likely a few weeks away markets are waiting for that information to emerge.”

   

SCOTT BROWN, CHIEF ECONOMIST, RAYMOND JAMES, ST. PETERSBURG, FLORIDA

“We saw the Fed promoting liquidity almost every day last week. And they took several more new steps today. It’s hard to keep up with all this progress. They are throwing everything in the kitchen sink.”

“One of the biggest fears we saw developing a few weeks ago was disruptions in the credit market. We anticipated there would be problems but the problems would be showing up so soon was disturbing. The credit market issues threaten to make this downturn a lot worse so the Fed is moving to ensure liquidity in the system.

“These efforts alone are not going to do anything against the virus – that’s the big problem. We are going to take a pretty big economic hit here and economists have been revising their growth outlooks down and down and down every day.

“It will help but we still need fiscal stimulus and we need a lot of it. We need it geared towards the people who are going to be really suffering. Extended unemployment insurance benefits, bail outs for small firms, some help for corporations and people at the lower level of the economy that are going to be hit hard. The anecdotal stuff that I am hearing is that it’s really horrible for some people, for example those in the hospitality industry, who have lost their jobs and they don’t have any income. It’s a full blown crisis at this point.”

Compiled by Alden Bentley

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