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Market Updates volatility Trading Education Stocks Coronavirus Interest Rates

Fed Makes a Statement With More Rate Cuts

We Are Taking This Very Seriously

These are historic moves we’re witnessing. Get your stories straight, because we’re going to be talking about this for many years to come. The stock market is getting rocked, bond yields are dropping, and we’re starting to hear whispers of some big name hedge funds being on the brink of collapse. This is no joke. Though it did not start out as a financial crisis, it's rapidly turning into one. Credit markets are getting squeezed so the Fed is stepping in to try to cool things off.

Big Bet on the Economy

In an effort to alleviate some of the burden on consumers, the Fed came out Sunday afternoon with another surprise rate cut. The Fed Funds rate was slashed by a full percentage point and will sit in a range between 0% and 0.25% for now. From here, there’s really only one place left to go for interest rates, and that’s negative.  Because of this surprise rate cut, the FOMC meeting that was scheduled for Wednesday (March 18) has been cancelled, however, this does not take another unscheduled  off the table.

The Fed also announced that it would be purchasing $700 billion in treasury and insurance bonds as sort of an added stimulus. We’re going to need it too!

During the 2008 credit crisis, over the span of 12 months we watched as the Fed lowered rates from 3.5% to 0%, while simultaneously bailing out the banks. Even though ‘The Great Recession’ (as it came to be known) ended in June of 2009, interest rates remained at zero until December of 2015. Historically, low rates have given struggling economies just the boost they need to pull themselves out of recession. However, according to the stats, the U.S. economy remained strong right up to the point when the outbreak of Covid-19 reached North America. Also note that this has not yet been declared a recession.

This is the kind of event that can absolutely cripple an economy. We’ve already been seeing increased travel restrictions, quarantines, self-quarantines and now state and local governments are ordering bars and restaurants to close out of concerns for public safety. These are all good ideas to help curb the spread of the disease, but there are long term side effects that we’re going to have to deal with.


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Virus Prompts Closures

The shutdowns are mounting rapidly. In Illinois, where there are currently 105 confirmed cases of Covid-19, the governor has ordered the statewide closing of all bars and restaurants until April 1. So far there has been little government response to owners requests for emergency assistance for employees, which includes the elimination of payroll taxes as well as rent and loan abatement for furloughed employees. Though a larger response is expected, timing is everything at this point.

People’s livelihoods are now also in jeopardy. Workers across the country are going to start feeling the real effects of these shutdowns very soon. Like I said, these are not bad ideas, but a system should be put in place for dealing with the fallout before some of these decisions are made. The scenes from O’Hare International Airport over the weekend were absolutely frightening from a health hazard standpoint. 

Municipalities across the country started restricting the size of groups meeting in public last week, and nationwide airport delays resulted in clear violations of those laws. It’s been reported that the bottlenecks mostly occurred at TSA checkpoints where passengers returning from Europe were being screened. Good policies, poor execution.

Again, Price Limits

As always, when volatility gets to these extreme levels, you should continue to be aware of and monitor price limits. During Sunday night’s Globex trading session, U.S. equity index markets were once again locked limit down when prices fell to the 5% mark. The selloff continued after the 8:30 AM CT bell, and stocks fell to the 7% circuit breaker level, where trading was halted.

The 13% circuit breaker was never triggered, however, the Dow Jones Industrial Average fell nearly 1,000 points in the last hour of trading. Based on moves like that, we expect the volatility to continue this week, so here is a quick reminder of how price limits and circuit breakers work.

According to the CME Group’s price limits guide, there are 4 tiers of “circuit breakers” before trading is permanently halted for the day.

  • Tier 1: 5%
  • Tier 2: 7%
  • Tier 3: 13%
  • Tier 4: 20%

Tier 1 applies only to the overnight Globex session, which occurs between 5:00pm and 8:30am central time. Tiers 1, 2 and 3 apply to regular trading hours, from 8:30am to 3:15pm central time. 

Once prices trade below the 7% circuit breaker, trading will be halted for 15 minutes while price limits are extended. This process repeats for Tier 3 when prices drop below 13%. Once the market drops below the 20% level, trading will be permanently halted for the day, and the market will not re-open again until the start of the following day's session.

We’re Here To Keep You Informed

At Topstep, we will continue to do our part to inform you of new developments. It’s a good idea to bookmark the Center for Disease Control (CDC) and the World Health Organizations (WHO) websites for reference also. They are good resources for information on basic preventative measures and health advice.

These are trying times for all of us. We want everyone to stay healthy and informed, so if you have any questions, please reach out to us. You can find us on all social media outlets, e.g. @TopstepTrader, and our support staff is always available, just send an email to support@topsteptrader.com.

We implore you to take the steps necessary to keep yourselves and others healthy. Trade Well!

 

Posted by John Doherty on March 16, 2020

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