(09 March 2020)DAILY MARKET BRIEF 2:The Federal Reserve (Fed) expectations went ballistic.

The Federal Reserve (Fed) expectations went ballistic. Activity on US sovereigns now suggests 70% probability for a 75-basis-point cut at next week’s policy meeting, and 30% probability for a 100-basis-point cut. And we are not even sure that a sizeable Fed action has the means to calm the markets, given that investors have already let the Fed know that low rates is not the source of the problem, but supply chain disruptions are. But the Fed has its hands tied. A 50-basis-point cut is the minimum we expect at next week’s FOMC meeting.

It is certain that at this point, there starts being a serious disconnect between the potential of coronavirus shock on the economies and market pricing. There may even be a disconnect between the measures taken to contain the virus and the severity of health implications caused by it. It is sane to keep in mind that though the Covid-19 is a highly contagious virus, significantly more lives are lost due to a typical seasonal flu each and every year.

Economic data in the US so far shows that the coronavirus fears have not been materialized as badly as priced in. Solid jobs report released in the US on Friday showed that the US economy added 273’000 nonfarm jobs in February, almost 100’000 more than expected. The numbers suggest that the US economy remains at a ‘good position’ and should be capable of withstanding the coronavirus shock to the economy. Hence, the actual sell-off is a mix of speculation and amplified panic that has been triggered by the coronavirus, but merely reflects the true extent of the outbreak.

Now we clearly see that speculation is a dangerous game. And because it doesn’t necessarily rely on the facts, it is difficult to foresee how far it could drag the markets.

We believe that once the OPEC shock is left behind, it will gently be time to consider a justified upside correction to the current bear market. Though, a readjustment of central bank expectations may dent the recovery in the medium term.

By Ipek Ozkardeskaya