Whoops! Why Rate Cuts Are Backfiring

Wednesday, 4 March 2020
Adelaide, Australia
By Bernd Struben

  • Markets
  • Gold stocks bucking the downtrend

If you start to cough, don’t bother contacting your regional central banker. He has no antibodies that work against a virus.

Agora Founder, Bill Bonner

For the first time, in a long time, investors aren’t buying into the ‘bad news is good news’ mantra.

This refrain has seen stocks mostly rise on the back of poor economic news or geopolitical tensions for more than a decade. That’s because investors have become accustomed to central bankers covering their backs.

Any significant pullback in share markets has quickly ushered in lower interest rates and QE. And markets have rallied back to ever higher-highs.

The reaction from the world’s leading central banks to the new virus crisis is to do more of the same.

At first glance the mere expectations of more easy money looked like it could reverse last week’s savage sell-off. The Dow gained 5.1% on Monday and the ASX 200 closed up 0.7% yesterday.

But it’s telling that the ASX 200 was up 1.8% at 2pm yesterday. That was before RBA boss Philip Lowe announced a 0.25% interest rate cut, bringing the cash rate to a fresh record low 0.5%. He even hinted at another, final, cut to come. Yet investors reacted by hitting the sell button.

Not to be outdone…

Enter US Fed Chair Jerome Powell:

The magnitude and persistence of the overall effect on the US economy remain highly uncertain and the situation remains a fluid one. Against this background, the committee judged that the risks to the US outlook have changed materially. In response, we have eased the stance of monetary policy to provide some more support to the economy.

Powell ushered through a 0.50% rate cut, bringing the official US rate to 1.25%. And he did it before the FOMC meeting two weeks from now. That’s the first rate cut outside a scheduled meeting since October 2008.

Imagine Powell’s surprise when US markets all closed with heavy losses. The NASDAQ led the way down, losing 2.99%.

And defying the RBA’s own rate cut, the ASX is following the US lead lower. At time of writing the index is down 1.63%.

Clearly investors are spooked by the chasm of unknowns the coronavirus — and governments economically stifling efforts to contain it — present. Forward earnings estimates for most companies are becoming little more than wild, often hopeful guesses.

And Powell’s words only stirred the angst. In a single paragraph he admits the outlook is ‘highly uncertain’, and that ‘the risks… have changed materially’.

Not particularly encouraging. And why I wrote yesterday that, ‘If you’re looking at bargain hunting, most of our editors advise caution.

Caution and patience remain in order today…and likely for weeks if not months to come. ‘Don’t get caught in the fleeting rallies,’ analyst Lachy Tierney says.

If you’re keeping up with your paid publications and Port Phillip Insider (your free supplement) I hope you weren’t caught in the fleeting rally. As another reminder, here’s what I wrote in yesterday’s Insider:

The way I read these chicken bones, the current rally isn’t signalling any meaningful trend reversal. In fact, I doubt the current stock buying spree will make it to the end of this week. Let alone run for months.

If the rally sputters, though, it won’t be for lack of effort from the world’s central bankers.

Indeed. The central bankers are going all in.

But there are few apparent winners.

Bonds count among those.

In the rush to safety, the US 10-year Treasury yield fell beneath 1%. That’s its lowest yield ever. Meaning bond prices are at record highs.

Gold…and gold miners…look to be another winner from the combination of lower rates and fears of a global recession.

We’ll get back to that right after the markets…

Markets

Overnight, the Dow Jones Industrial Average closed down 785.91 points, or 2.94%.

The S&P 500 closed down 86.86 points, or 2.81%.

In Europe the Euro Stoxx 50 index closed up 33.14 points, or 0.99%. Meanwhile, the FTSE 100 gained 0.95%, and Germany’s DAX closed up 127.52 points, or 1.08%.

In Asian markets Japan’s Nikkei 225 is up 74.26 points, or 0.35%. China’s CSI 300 is up 0.03%.

The S&P/ASX 200 is down 104.68 points, or 1.63%.

West Texas Intermediate crude oil is US$47.39 per barrel. Brent crude is US$51.86 per barrel.

Turning to gold, the yellow metal is trading for US$1,643.95 (AU$2,486.31) per troy ounce. That’s up 3.4% in US dollar terms since I wrote to you yesterday. Silver is US$17.24 (AU$26.07) per troy ounce.

One bitcoin is worth US$8,756.73.

The Aussie dollar is worth 66.12 US cents.

Gold stocks bucking the downtrend

As mentioned above, gold spiked 3.4% overnight. That puts its year-to-date gains at 8.3%. By contrast the ASX 200 is down 5.2% over that same time.

Gold’s haven status is seeing some big gains among a number of gold miners. And with the Aussie dollar trading near 11 year lows, Aussie miners are well-placed to make the most of gold’s rally.

Saracen Mineral Holdings Ltd [ASX:SAR], for example, is up 7.2% in intraday trading. As you can see in the chart below, SAR’s share price has now gained 25.3% since 2 January.


Port Phillip Insider

Source: Google Finance

[Click to open in a new window]

Regis Resources Ltd [ASX:RRL] is also rocketing higher, up 6.9% at time of writing. Though RRL is still down 6.0% for the year.

Then there’s Northern Star Resources Ltd [ASX:NST]. The share price is up 7.0% so far today. And it’s up 25.2% since 2 January.

These figures come as no surprise to Aussie gold expert, Shae Russell.

Shae spearheads Rock Stock Insider, published by our friends at Fat Tail Media. On Monday, after gold had dropped lower, she told me, ‘I still reckon the metal will finish the year around US$1,750–1,820 per ounce.

Though I should point out she expects a short-term pullback before that.

Today she writes:

How many people are thinking about a potential commodities boom on the back of the virus? Few, I’d say.

This why it’s so important to look beyond the headlines and look for how you can benefit from it.

Based on the almost certain coming wave of government stimulus, Shae is also cautiously optimistic on the outlook for copper, cobalt and nickel. Those should all benefit if the government splurges on ‘green’ projects.

And a boost in infrastructure spending should see higher prices in iron ore, steel and…again…copper.

But she maintains that investors have the best potential for big gains in today’s highly uncertain markets with good old gold. And gold stocks.

For the full story, go here.

Cheers,
Bernd