European stocks drop after Fed warns of slow coronavirus recovery

European stocks drop after Fed warns of slow coronavirus recovery

US central bank pours cold water on hopes of swift economic rebound from pandemic

European stock markets fell on Thursday, as hopes for a quick recovery from coronavirus faded after the head of the US central bank warned of long-term damage to the world’s biggest economy.

London’s FTSE 100 dropped 2.3 per cent, while Frankfurt’s Xetra Dax fell 1.7 per cent and the region-wide Stoxx Europe 600 dipped 1.6 per cent.

The declines come a day after Jay Powell, chair of the US Federal Reserve, warned that a US “recovery may take some time to gather momentum”, adding the country risked an “extended period of low productivity growth and stagnant incomes”.

“What was notable from his remarks was how he dwelled for some time on the permanent effects that a recession of such a large magnitude can have,” said Jim Reid, an analyst at Deutsche Bank.

Mr Powell’s comments come as optimism about the relaxation of lockdowns across Europe is tempered by fresh virus outbreaks in countries such as South Korea and China, which have already reopened their economies.

The downbeat prognosis from Mr Powell has damped investor optimism in Europe, despite the Italian government approving a €55bn fiscal stimulus package late on Wednesday. Milan’s FTSE MIB slipped 1.5 per cent.

Losses in Asia followed a retreat on Wall Street, where US stocks fell in the wake of Mr Powell’s comments.

A UN projection that the global economy will contract 3.2 per cent this year due to the virus added to the negative market sentiment.

Hong Kong’s benchmark Hang Seng fell
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later in the day, with the S&P 500 tipped to open 0.1 per cent lower. The S&P 500 finished Wednesday down 1.8 per cent, as US-China friction and uncertainty over the timeline for reopening the economy chiselled away at investor optimism.

Traders have also had to contend with a re-emergence of tensions between the US and China. Donald Trump this week ordered the US government’s main pension fund not to invest in Chinese stocks, prompting Beijing to warn Washington against turning the spat into a “financial fight”.

“Given the political incentive, Mr Trump may not be bluffing when he threatens to impose more tariffs as the ‘ultimate way’ to make China pay for the cost on America of the coronavirus outbreak,” said Chi Lo, Greater China economist at BNP Paribas Asset Management. 

Oil prices rose after the International Energy Agency predicted that the drop in demand for crude this year would not be as severe as initially thought, as supply dropped to a 12-year low.

Brent crude, the international benchmark, was up more than 4 per cent to $30.36 per barrel, while West Texas Intermediate, the US marker, rose 5.2 per cent to $26.62 a barrel.

Additional reporting by Daniel Shane in Hong Kong

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