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Coronavirus Might Trigger Rate Cut: Double Whammy for Banks

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During the FOMC meeting in December 2019, the Federal Reserve had indicated that it will keep interest rates unchanged this year. However, within three months, the stance is likely to chance.

Per the CME FedWatch tool, there is a 77.1% chance of the central bank cutting interest rates by 25 basis points (bps) and 22.9% chance of 50 bps cut in March. This is a drastic change from 35.4% chance of 25 bps rate cut predicted a day before.

So, what led to the change in perception in a just day?

Fast spreading of coronavirus, also known as COVID-19, across the globe, with several countries reporting first virus cases is the primary reason for the change in stance. This led to rise in recession fears among investors and triggered a huge sell-off in the stock markets globally.

In fact, the U.S. equity markets tumbled on Thursday as well, marking the sixth consecutive day of sell off. Since Feb 19, the S&P 500, Dow Jones and Nasdaq have tanked more than 12%. Also, yield on the 10-year U.S. Treasury note declined to an all-time low on Thursday, as investors are moving toward safe-haven assets.

Travel restrictions, business shut downs and other measures taken to curb the spread of virus in China (the world second largest economy) are likely to dent this quarter’s GDP numbers and have ripple effects across the globe. Further, these are disrupting supply chains and sales generation of several global tech, auto and travel sector companies. Major tech names, including Microsoft MSFT and Apple AAPL, have already warned of negative impact of slowdown in China to their businesses.

Further, the economic impact of coronavirus on the U.S. economy is now likely to be more than previously expected. Per IHS Markit data, manufacturing and business activities in the country seem to have contracted in February for the first time since the federal government shut down in 2013.

With the economy likely to be adversely impacted due to coronavirus concerns, banks are likely to face a double whammy. With the Fed expected to cut interest rates again in March, this will strain the top line further. Also, lesser business investments are likely to result in lower loan demand.

Thus, investors should exercise extra caution before investing in bank stocks. Also, though all the banks big or small are likely to be adversely impacted, for major global banks like Bank of America BAC, JPMorgan JPM and Citigroup C, this could turn out to be a bigger concern. In fact, diversification could turn out to be a negative factor.

Therefore, banks with only domestic operations like Truist Financial TFC, Zions Bancorporation and M&T Bank MTB could turn out to be better investing options. Still investors should check out individual company fundamentals and key near-term concerns before taking any decision.

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