Stocks Plunge Again After Paring Losses on Feds $2 Trillion Boost to Lending Markets

An extraordinary $2 trillion injection into the short-term lending market by the Federal Reserve on March 12 did not help the stock market as it plunged 10 percent in the worst day for the Dow industrials since 1987.

After plunging by more than 8 percent upon opening on Thursday, the U.S. stock market sharply but briefly pared the losses to 3 percent in response to the New York Federal Reserves announcement of plans to offer a $500 billion short term bank-funding operation the same day, followed by two $500 billion offerings on Friday.

But the recovery was brief, with all three major stock indexes falling back to more than 9 percent in losses at the closing bell.

The central bank is also broadening its ongoing $60 billion-a-month purchases of Treasurys to include longer-term bonds. The New York Federal Reserve in a statement explained its measures as necessary “to address temporary disruptions in Treasury financing markets.”

The stock market selloff is driven by the Wuhan coronavirus pandemic and the crash in oil prices. Thursdays losses are linked in part to the U.S. government announcement of a travel ban on some travelers from Europe. Similar restrictions, cancellations, and other preventative measures around the world are also suppressing demand and economic activity.

Airline stocks took a hard hit with Southwest Airlines closing down more than 15 percent, American Airlines down more than 17 percent and Delta Airlines down 21 percent.

Meanwhile, major U.S. oil companies were hammered by the decline in oil prices driven by the fallout from a failed deal between Russia and the Saudi-led Organization of the Petroleum Exporting Countries (OPEC). ExxonMobil closed down more than 11 percent, Valero Energy down more than 19 percent and Chevron was down 8 percent.

The Feds announcement also caused Treasury yields to fall before they rose back up again.

The reaction in the markets suggested little faith that the Feds moves would do much to restore the confidence of investors and consumers in the face of travel disruptions, event cancellations, and business closures.

Thursdays central bank action, being led by the New York Fed, is intended to keep credit markets functioning and ensure that banks can continue to provide loans to businesses and other borrowers across the economy.

“The New York Fed fired its bazooka,” said Paul Ashworth, an economist at Capital Economics.

The action follows signs of stress in the bond market. On Wednesday when the stock market plunged, bond yields actually rose. Typically, in circumstances like this, the two would move together: Investors would move en masse into the bond market, driving down bond yields as bond prices rose.

The disjointed move in prices likely signals a lack of liquidity in the bond market. That means there are too few buyers or sellers, causing prices to move violently and make prices less easy to pinpoint.

“There are massive concerns out there,” said Tom di Galoma with Seaport Global Holdings. “Market-making is under severe pressure. This is beyond the markets current capabilities.”

In a note to investors, analysts at Bank of America said that the U.S. bond market has “materially deteriorated over recent days” and now “requires a rapid and large near-term policy response from the U.S. treasury or Federal Reserve.”

The market for U.S. Treasurys is the foundation of all other financial products on Wall Street. Because investors believRead More – Source