March 3, 2020 / 2:39 AM / in a month

Gold jumps, stocks slide after Fed's rate cut

NEW YORK (Reuters) - Global equity markets fell more than 3% while gold prices surged on Tuesday after the Federal Reserve cut interest rates in an emergency move to shield the U.S. economy from the impact of the coronavirus.

The 10-year U.S. Treasury note fell below 1% as markets reacted to the Fed’s surprise cutting of its federal funds rate by a half percentage point to a target range of 1.00% to 1.25%.

Fed Chair Jerome Powell said in a statement the coronavirus would weigh on the U.S. economy for some time and that he believed the central bank’s action would provide “a meaningful boost to the economy.”

The slide in stocks and rise in safe-haven gold suggested markets found the Fed’s action an inadequate response to an epidemic that has killed more than 3,000 people worldwide.

“The Fed’s pre-emptive strike against the coronavirus has backfired,” said Michael Arone, chief investment strategist at State Street Global Advisors in Boston.

“The reaction has signaled to the markets that the coronavirus is on par with things like the Great Depression, the technology-media-telecom bubble bursting or the global financial crisis,” he said.

Demand is falling, supply chains have been disrupted and lower interest rates do not cure those two symptoms, Arone said.

The unanimous decision by policymakers to cut rates before their next scheduled policy meeting on March 17-18 reflects the urgency with which the Fed felt it needed to act to prevent a potential global recession.

Stocks on Wall Street initially spiked more than 2% on the Fed's surprise statement. But the Dow Jones industrial average .DJI, Nasdaq composite index .IXIC and S&P 500 .SPX fell sharply in afternoon trading.

President Donald Trump said his administration was working with Congress to pass an emergency spending measure to ramp up the U.S. response to the coronavirus, adding that he expected lawmakers to authorize about $8.5 billion.

The Fed’s rate cut “spooked investors after the strong rebound (on Monday) because it was made right away and it was 50 basis points,” said Alan Lancz, president of Alan B. Lancz & Associates Inc in Toledo, Ohio.

“It was larger than people (were expecting), and some may be thinking, ‘Ooh, are things worse than we think?’”

The Fed’s announcement largely validated expectations from investors for aggressive policy action, said Candice Bangsund, a global asset allocation strategist at Fiera Capital in Montreal.

“It’s become increasingly clear that policymakers have made stemming the damage from the outbreak a priority, which should help to place a floor under risky assets in the near-term.”

Shares in Europe rose more than 2% on the day, while MSCI’s all-country world index rose almost 1%.

The Group of Seven finance officials said in Tokyo they would use all appropriate policy tools to achieve strong, sustainable global growth and safeguard against downside risks posed by the coronavirus.

The Fed’s rate cut and G7 statement came after global stocks last week suffered their worst rout in a decade on fears that disruptions from the epidemic to supply chains, factory output and global travel could seriously slow the world economy.

“The G7 is essentially trying to reassure markets but it doesn’t have the ability to really impact interest rates directly,” said Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin, Texas.

MSCI’s gauge of stocks across the globe .MIWD00000PUS shed 1.10% and emerging market stocks rose 0.92%.

The pan-European STOXX 600 index rose 1.37%

The Dow Jones Industrial Average .DJI fell 745.82 points, or 2.79%, to 25,957.5, the S&P 500 .SPX lost 81.08 points, or 2.62%, to 3,009.15 and the Nasdaq Composite .IXIC dropped 260.59 points, or 2.91%, to 8,691.58.

Gold surged. Spot gold XAU= added 2.7% to $1,633.30 an ounce.

The dollar fell across the board.

The dollar index =USD fell 0.415%, with the euro EUR= up 0.46% to $1.1183.

Traders work on the floor at the New York Stock Exchange (NYSE) in New York, U.S., March 2, 2020. REUTERS/Brendan McDermid

The Japanese yen JPY= strengthened 1.01% versus the greenback at 107.25 per dollar.

Oil prices rose but remained below session highs.

Brent crude LCOc1 rose 19 cents a barrel to $52.09, off a session high of $53.90 a barrel hit immediately after the rate cut. U.S. West Texas Intermediate (WTI) CLc1 added 31 cents a barrel to $47.06 a barrel, after trading as high as $48.66.

Reporting by Herbert Lash and Matt Scuffham; additional reporting by Caroline Valetkevitch; Editing by Dan Grebler and Richard Chang

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