Central Banks Administer Their Meds 💉

Table of Contents

Central Banks Administer Their Meds

Central banks’ hands are being forced, perhaps not by the coronavirus, but by its market response. Following an emergency meeting, the Federal Reserve has cut interest rates by 50 basis points. The European Central Bank (ECB) looks set to follow.

The hope is to stimulate business investment by lowering the cost of borrowing. That’s a big relief not only for businesses, but for homeowners who can now refinance mortgages and live within their means now that 401ks aren’t so rosy. Fewer household overheads mean more cash to splash on the products and services sold by companies who’ve lost 10-15% of their share prices.

However, a knee-jerk rate cut is not a vaccine. If cases keep compounding and the fear of infection keeps growing, shoppers won’t head out to spend no matter how low monetary policy goes. This dilemma is now in the hands of the market. Man versus microbe!

If investors expect contamination to spread, Monday’s biggest Dow Jones single-day gain in history could prove to be a dead cat bounce. If markets drop another few thousand points today, what then? It’s no wonder Christine Lagarde of the ECB is waiting for the opening bell Stateside. With Europe on the brink, she can’t waste the little easing ammo she has left temporarily reflating a bubble!

If Lagarde goes unmoved, expect homebuilding stocks to pop. J.R. Horton and Pulte Group flew on news of a worsening coronavirus in the US. As treasury bond investors drove down yields 16% in their rush for safety, mortgage rates swooped to ever lower lows. People started refinancing, and it became competitive to buy a home. Build time!

If Lagarde does blink, however, European banks won’t take the news well. They make their money by paying less in interest payments to savers than they receive from others to whom they lend those savers’ deposits.

JP Morgan dropped 4% yesterday, Bank of America 5%, and Morgan Stanley 2%. When interest rates drop, banks get less for lending those savings out. Profit margins are slimmed, and stock prices go south.

It may be time to start to averaging down into undervalued stocks, but everyone’s waiting on each other to see the response to this monetary stimulus. Bullish? Bearish?

Share:
More Posts
Get your daily Invstr Crunch

Get the market news and updates you need, delivered to your inbox or available on our daily podcast.

Risk Disclosure:

Invstr is not a bank and banking services are provided by Vast Bank, N.A.

Brokerage and Banking services are currently only available to U.S. residents.

Invstr app and web services are provided by Invstr Ltd. Advisory services are provided by Invstr Financial LLC, an investment adviser registered with the Securities Exchange Commission (SEC) details of which can be obtained here. Securities brokerage and custody services are provided by Apex Clearing, a broker dealer registered with the SEC and a member of FINRA and SIPC. There is no bank guarantee on securities and securities may lose value.

Investing involves risk and can lead to losses. Past performance does not guarantee future results.

Invstr app and web services are provided by Invstr Ltd. Invstr+ advisory services are provided by Invstr Financial LLC, an investment adviser registered with the Securities Exchange Commission (SEC). Securities brokerage and custody services are provided by Apex Clearing, a broker dealer registered with the SEC and a member of FINRA and SIPC. There is no bank guarantee on securities and securities may lose value. Vast Bank N.A. a nationally chartered bank and member of the FDIC, provides the banking products, including the products and services related to digital asset accounts. As with any asset, the value of Digital assets can go up or down and there can be a substantial risk that you lose money buying or holding digital assets. You should carefully consider whether trading or holding Digital assets is suitable for you in light of your financial condition. Your digital account does not support wallet to wallet transferring of your digital assets (i.e. cryptocurrencies) outside the platform. Any Digital Assets in your digital asset account are not insured by any government entities, including but not limited to FDIC or SIPC. The Invstr Visa® Debit Card is issued by Vast Bank, N.A. pursuant to a license from Visa U.S.A Inc and may be used everywhere Visa debit cards are accepted. Invstr Ltd, Invstr Financial LLC and Invstr Securities Ltd are subsidiaries of Marketspringpad Holdings (collectively “Invstr”) and Invstr is solely responsible for the application services and website content.

Watchlists provided when users first access the service are not a recommendation to invest. Instead they are provided to help users better navigate the service. Users are free to edit and create their own watchlists. From time to time, Invstr will suggest instruments solely based on an individual’s interest and the interest levels of the Invstr community. The statistical and portfolio builder models generated by Invstr do not reflect actual investment results and are not guarantees of future results. Comments provided by Invstr leaders, influencers or members of the Invstr Community are not recommendations and should not be construed as such. Invstr does not endorse the content or the positions posted by them. Their investment approach, and that of the models provided by Invstr, may be different from yours and may not be appropriate for you.