Why is the ASX down after Fed and RBA Rate Cuts?

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The ASX 200 [XJO] is currently down .96% sitting at 6374.2 points.

You might be wondering, why is the ASX down after the Federal Reserve and RBA rate cuts over the last two days?

Traditionally, these sugar hits work for a period of time.

You can see how trading progressed in the first two hours below:

ASX 200 (XJO) Down after RBA Rate Cuts - COVID-19 Market Crash

Source: tradingview.com

A lot of the action in today’s markets comes down to investor psychology. We take a look at how the central bank response was already anticipated by the market in the short relief rally yesterday.

ASX is down because monetary policy is not health policy

Overnight, the Federal Reserve sprung a surprise 50 basis point cut on markets, hoping to diminish fears of a sustained downturn.

But the Dow had likely already priced in the ‘surprise’ with a more than 1,300 point jump the day before.

The flow-on effects from the enthusiasm on Wall Street impacted the ASX also.

[XJO] finished yesterday up marginally to 6452, dragged down by Australia’s heavy reliance on the financial sector.

The Big Four all lost ground as investors anticipated a squeeze on the banks margins.

Consequently, CSL Ltd [ASX:CSL] finally overtook Commonwealth Bank of Australia [ASX:CBA] in terms of market cap.

But overnight trading on the Dow saw the index shed 355 points in total after surging around 700 after the rate cut was announced. After this surge the Dow Jones plunged more than 1000 points.

As a result, it is no surprise to see the ASX 200 initially down over 1% again today.

This is because monetary policy is not health policy.

And no matter how much cash people have because their variable rate loans suddenly got cheaper, they can still fall ill.

RBA and Federal Reserve rate cuts are knee-jerk reactions

So when the RBA and Federal Reserve rate cuts finally got announced, it was actually worse for the Dow and ASX, because it reflects a knee-jerk response.

The question here is — why did you do it, if things weren’t so bad?

The only real remedy at this stage for markets, is some form of containment.

This is a genuine black swan event, one that forces you to reconsider your approach to investing.

In recent Money Morning pieces, our editors delve into various ways to think about your investments in this environment.

My colleague Ryan Dinse for instance, successfully tipped the recent market bounce.

And the other day, Sam Volkering threw up a whole host of stocks that could benefit from the isolation that comes with the disease.

You can get Money Morning direct to your inbox, seven days a week for free here.

Regards,

Lachlann Tierney

For Money Morning

About Lachlann Tierney

Lachlann Tierney is an Analyst for Money Morning and has been investing for nearly a decade. With a Masters of Science from the London School of Economics, he brings a sound understanding of global markets to his writing. Lachlann is interested in emerging technologies, energy solutions and helping people invest…

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