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

By ,

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.


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…

Is There Still Life in Small-Caps? — Some Exciting News

The chart tells you that small-caps aren’t dead. After the Morrison government effectively shouldered all the risk for loan guarantees, or at least 80% of it, there will be some ASX-listed small-cap beneficiaries…

What Next for Altium Share Price? (ASX:ALU)

We examine Altium Ltd’s [ASX:ALU] share price outlook after recent ASX tech sell-off. The last few months have not been kind to Altium and its share price. The ALU share price is down 22% …

Webjet Share Price Up on Government Support Package (ASX:WEB)

The Webjet Ltd [ASX:WEB] share price rose on news the government will support the domestic travel sector. The share price of Webjet Ltd [ASX:WEB] shares are down slightly by less than .7%, trading at $6.04…

ASX Weekly Market Outlook and the Top Movers Last Week

The All Ordinaries [ASX:XAO] experienced a strong week last week, gaining 261 points. The move up took place on slightly decreased trading volumes, but nothing to be concerned about…

Earnings Calendar and Why the ASX Is Lagging the US Stock Market

We should see some big moves in individual stocks on the ASX this week. Whether the ASX 200 moves up or down is yet to be seen. A lot of earnings are due and some will surely disappoint…

Thinking of an ASX 200 ETF? Where to Look for Opportunities

You may be thinking of buying an ASX 200 ETF that tracks the overall performance of [XJO] which is the ticker symbol for the index. So let’s take a look at what the ASX is up to, and where the best investment opportunities could be in the context of recent market moves….