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Coronavirus Threat May Trigger Rate Cut: Banks in Trouble?

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The Coronavirus, also known as COVID-19, which originated in China, has sent jitters across global markets, including the United States. Concerns over the crippling COVID-19 impact on the U.S. economy are keeping investors on their toes. Consequently, the yield on benchmark 10-year Treasury note plummeting sharply as investors is moving toward safe-haven assets.

A major sell-off was recorded following the drastic spreading of the virus globally. In fact, the U.S. equity markets continued to tumble last week. 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. Consequently, anticipations of another Fed rate cut this year, in a bid to help the economy, have been making rounds in the market which will further erode banks’ margin.

Therefore, amid all the jitters in the market, Fed chairman Jerome Powell issued a statement on Friday related to boosting of the U.S. economy.

“The fundamentals of the U.S. economy remain strong,” said Powell said in a statement released Friday afternoon. “However, the Coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy,” he further noted

During the FOMC meeting last December, the central bank had indicated that it will keep interest rates unchanged this year. However, within three months, the stance is likely to change.

Per the CME FedWatch tool, there is a 100% chance of the Fed cutting interest rates by 50 basis points (bps) in March.

With the viral infection now spreading across South Korea, Italy and Japan, the extent of its negative impact on supply chains and economic growth is difficult to estimate, since it is already emerging as a global epidemic.

To exemplify some data, manufacturing and business activities have been sluggish in February, spurring investor concerns and trader woes. Moreover, travel restrictions, business shut downs and other measures taken to curb the spread of COVID-19 in China are disrupting supply chains and sales prospects of big companies, including technology, auto sector and travel-related. Therefore, the U.S. economy is likely to be more impacted than previously expected.

Remarkably, for the first time, manufacturing and business activities in the United States contracted in February, since the federal government shut down in 2013, per data from IHS Markit.

With the economy likely to be adversely impacted due to Coronavirus concerns, banks are likely to be in trouble. 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.

Though all banks, big or small, are likely to be affected, this could turn out to be a bigger concern for major global banks like Bank of America BAC, JPMorgan JPM, Morgan Stanley MS and Citigroup C. Thus, investors should be extra cautious before investing in bank stocks and take into account individual company fundamentals and key near-term concerns before taking any decision.

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