A market crash similar to the one in 1987 was avoided, at least for the time being, by the Fed’s emergency rate cut. While US markets were closed yesterday, markets around the world experienced a mini crash with many having the biggest one day drop since Sep 2001, when the terrorist attacks in US caused a panic selling around the world. Although the cash markets were closed on Monday, stock index futures in the US did trade for several hours yesterday morning and the S&P 500 contract lost just over 5%, or 70 points, at its worst before trading stopped. The point where the futures stopped trading was so close to limit-down that it looked like a massive panic selling this morning was inevitable. At that point, it was quite clear that the Fed had no choice but to cut interest rates. And indeed, we got the cut this morning before the cash market started trading.

After gapping down nearly 4% for both Dow and S&P500, the market recouped most of the loss before the close. Several previously beaten-down sectors including financials and retailers were leading the way up while technology was clearly lagging. Although the market was more than 2% off its worst level of the day, I think it is premature to call today a capitulation day. On the one hand, we have VIX that earlier touched 37.57 before closing at 31.01. But it is important to keep in mind that VIX can move high and stay high for a period as long as several weeks. On the other hand, with more than half of the major world indices already entering the bear market territory, it’s difficult to see that the US market is able to escape such a scenario. US dollar lost grounds against major currencies after today’s interest rate cut and gold gained more than 1% after losing as much as 2% in overnight trading. Currently the market has priced in a 100% chance of another 25bps cut in Fed’s meeting next week and more than 75% chance of a 50bps cut. After the bell, Apple’s forecasts seemed to disappoint Wall Street and sent its shares down by more than 10%. It is worth noting that during a strong market, a report like today’s should not be of that great concern and today certainly seems otherwise. It will also be interesting to see how the Asian markets react to today’s Fed decision.