A whirlwind of information came rushing into financial markets Tuesday and early Wednesday, and markets are still trying to decide what to make of these developments. Super Tuesday, the single most important day in the U.S. presidential primary season, came to an end with results still not yet definitive in a few states as I write this column in the wee hours of Wednesday morning from Los Angeles. Major U.S. indices are indicating higher opens when markets open Wednesday morning in New York, seemingly applauding the results of Super Tuesday after shrugging off the Federal Reserve’s emergency rate cut earlier in the day.
The Federal Reserve cut rates by 50 basis points Tuesday, while U.S. financial markets were still open, giving equity markets a much-needed shot in the arm, but the impact was to be short-lived. It took markets a little over an hour to give back all the gains from the central bank’s rate cut, a “remedy” in response to heightened concerns over the spread of the coronavirus. All three major U.S. indices were down around 3% as investors questioned the Fed’s surprise move.
The first “emergency” rate cut since the financial crisis of 2008, the Fed’s cut spooked more investors than it calmed. Did the Fed have certain leading indicators that showed the coronavirus’s impact on the economy would be far worse than Fed officials had led on? This is seemingly the only realistic interpretation of why the Fed cut outside of a regularly scheduled meeting and investors sold off further deepening the indices entrance into “correction territory.”
The real catalyst for trading on Wednesday and in the near term are the results from the various state primaries held Tuesday. A last-minute announcement by Sen. Amy Klobuchar and former Mayor Pete Buttigieg dropping out of the race and backing former Vice President Joe Biden, propelled him to victories across Super Tuesday, surprising everyone including himself. Biden scored big in Texas and Massachusetts, while Sanders scored big in California and Colorado. Markets show a positive open in trading on the prospects of a Biden nomination because Biden is very much an establishment Democrat. No major overhauls of the health care system or the tax code make Joe Biden especially attractive to Wall Street firms, which would otherwise suffer under a Sanders presidency.
Sanders has made it clear he objects to the mere existence of billionaires; whereas Biden has already accepted campaign contributions from many, as Sanders loves to point out. The ultimate in scoring Super Tuesday will be how the delegate counts shape up, especially in a state like California, where, at present Sanders has over 32% of the vote with half of the state reporting.
Whatever finally happens as all the votes come in on Super Tuesday, the nomination process is almost certainly over for Michael Bloomberg and Elizabeth Warren, both of who performed badly. From here on out it will be progressive versus “centrist” Democrats. Financial markets prefer the latter, but who the American people will pick has yet to be seen.
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