European stocks tumbled on Monday, as sweeping central bank intervention failed to staunch the wave of volatility that has shaken global markets.
The FTSE 100 fell 4.7 per cent at the open, taking losses so far this year for the London blue-chip index to more than 30 per cent. The sell-off was widespread across Europe: Germany’s Dax and France’s Cac 40 were 4.6 per cent lower.
The Federal Reserve cut US interest rates before markets opened on Sunday and joined forces with other central banks in a bid to prevent a more severe economic downturn and market dislocation caused by the coronavirus pandemic. The Fed slashed its main policy rate by a full percentage point to between zero and 0.25 per cent — a level last seen in 2015. It also unveiled at least $700bn in asset purchases.
Despite the central bank action, which is without parallel since the financial crisis, S&P 500 index futures fell as much as 5 per cent, triggering exchange circuit breakers and tipping heavy falls when Wall Street begins trading later in the day.
“The Fed has thrown everything at this. If we are now facing the end of central bank action, it means we are on our own,” said Seema Shah, chief strategist at Principal Global Investors. “There is a fear settling in the market, investors are terrified that this was all that was left.”
Volatile trading in global stocks is now stretching into its fourth week as the extent of the pandemic’s economic disruption has become clear. US stock markets fell nearly 10 per cent on Thursday, before swinging higher by the same margin in the following session, in outsized daily moves not seen in more than a decade.
Joachim Fels, Pimco global economic adviser, said the concern was “what currently looks like an inevitable recession . . . turning into a depression, and financial markets [going] from a drawdown to a meltdown”.
Airline stocks were especially hard hit on Monday as travel bans were extended globally. British Airways parent IAG tumbled 20 per cent, while Air France-KLM dropped 16 per cent and Germany’s Lufthansa shed 10 per cent.
The 10-year US Treasury yield slid 0.16 percentage points to 0.7924 per cent as investors moved into the government debt. Yields fall as bond prices rise.
The Bank of Japan on Monday followed the Fed’s actions by announcing it aimed to double its purchases of exchange traded funds to ¥12tn ($112bn) a year. However, the central bank left its key policy rated unchanged at -0.1 per cent.
Japan’s benchmark Topix closed 2 per cent lower after the announcement. The yen, a haven during times of uncertainty, also rose 1.3 per cent to ¥106.50 per dollar.
In Asia-Pacific markets, Australia’s S&P/ASX 200 index plunged 9.7 per cent while Hong Kong’s Hang Seng index fell 4.3 per cent and China’s CSI 300 closed down by the same margin.
“After the Fed's rate cut, it is getting difficult to rule anything out from what central banks will do,” said a Tokyo-based broker. “I have to tell clients that anything’s possible.”
While the Fed’s measures were stronger than expected, news of the outbreak’s spread over the weekend had meant that investors were already girding themselves for another market drop.
Zach Pandl, an analyst at Goldman Sachs, suggested that central bank action may only help “on the margin”, pointing to the accelerating outbreak in Spain and France and shutdowns in some US schools.
But he added that it “should significantly ease funding market stress, particularly the dollar shortage overseas”. More government spending will be needed to damp demand for US treasuries, he added.
The Fed might need to keep its benchmark rate at the so-called zero lower bound until the end of 2022 and increase its asset purchases, UBS said on Monday. Analysts at Capital Economics said the measures announced by the Bank of Japan “lack teeth”.
Meanwhile, China’s central bank on Monday injected about Rmb100bn ($14.3bn) of liquidity into financial markets via its medium-term lending facility. But traders said it was unlikely to immediately cut its benchmark lending rate as this might not help the real economy, with supply chains and other industries hit by coronavirus.
“Over the next month, or even quarters, there is going to be easing of both monetary and fiscal policy but I don’t think they want to do it now,” said a trader at one Shanghai-based brokerage.
New Zealand’s central bank also cut interest rates by 0.75 percentage points to 0.25 per cent.
Analysts have grown worried that even forceful monetary easing will only go so far in softening the economic impact of coronavirus. Many are anxious for governments to aggressively spend to make up the shortfall in demand.
“They are pulling out all the stops. This tells you this is a serious situation,” said Torsten Slok, chief economist at Deutsche Bank Securities. “There are now also zero interest rates in all OECD countries. This tells you there is limited firepower left now. They have decidedly handed over the baton now to fiscal policy.”
Oil prices recommenced their descent as markets opened on Monday, with international marker Brent crude losing nearly 5 per cent to trade around $32 per barrel.
Reporting by Hudson Lockett in Hong Kong, Leo Lewis in Tokyo, Katie Martin, Philip Georgiadis and David Sheppard in London, Robin Wigglesworth in Oslo and Jennifer Ablan and Colby Smith in New York
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March 16, 2020 at 03:30PM
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