Global stocks, oil prices and government bonds tumble

Global stocks, oil prices and government bonds tumble

Dow wipes out gains of the Trump presidency amid fears antivirus measures are inadequate

Global stocks, oil prices and government bonds fell sharply on Wednesday, indicating forced selling across financial markets and raising doubts about governments’ ability to contain the economic damage inflicted by the coronavirus outbreak.

The prospect of slumping energy demand sent the US oil benchmark WTI crude down about 24 per cent to $20 a barrel, the third worst day on record. Brent, the international benchmark, dropped about 9 per cent to a 17-year low of $26 a barrel. 

The sharp sell-off in US equities reversed much of the gain seen on Tuesday despite the Federal Reserve overnight unveiling the latest in a series of support measures and the White House’s talks with Congress on a $1tn fiscal stimulus package.

The S&P 500 index closed down 5 per cent, off its lows for the day. The Dow Jones Industrial Average was off more than 6 per cent, all but erasing its gains since Donald Trump’s inauguration as president on January 20, 2017.

The US dollar rallied and sterling fell 4 per cent in violent trading. The UK currency hit a low of $1.1463, having closed the previous day at $1.2050

“There’s more bad news about the potential severity and duration of the global economic sudden stop, continued signs of stress in the functioning of markets and concern about a generalised financial deleveraging,” said Mohamed El-Erian, chief economic adviser at Allianz. 

After rallying early on Wednesday, US Treasuries sold off sharply, with the benchmark 10-year yield rising 0.12 percentage points to 1.20 per cent. Yields on European government debt rose to their highest levels in weeks as fund managers came under pressure to return cash to investors and were forced to dump their most liquid holdings, according to traders. Yields move in the opposite direction to prices.

“I don’t think we’ve seen a day like this which is so obvious that investors are going to cash,” said Yousef Abbasi, global markets strategist for INTL FCStone Financial in New York. “Anything you thought would indicate a market bottom, throw it out the window.”

Germany’s 10-year yield climbed sharply to minus 0.26 per cent at one point, the highest in two months, while UK 10-year gilt yields leapt to 0.70 per cent. Stocks globally were weaker almost across the board, as governments’ efforts to shield economies from the impact of coronavirus failed to provide much comfort to investors.

The pressure was even more intense in riskier eurozone government bonds. Italy’s 10-year yield surged to 2.78 per cent, the highest in more than a year, before paring some of its losses. As recently as early March, Italy was able to borrow for a decade at roughly 1 per cent. 

Investors said the prospect of a big increase in bond issuance in the US and Europe to fund efforts to tackle the health crisis was weighing on bond markets. But the absence of any flight to assets normally considered safe — gold was lower, for example — suggested forced selling across Europe.

“The market declines have been so severe and swift that distress will be inevitable in some areas,” said Steven Bell, Chief Economist at BMO Global Asset Management. “Widespread liquidations have not been reported but they do remain a risk.”

London’s FTSE 100 deepened its declines through the trading day to fall over 4 per cent as a new wave of concerns over the global economy snuffed out a brief market rally. The losses were spread across Europe, as in Frankfurt the Dax slid more than 5.5 per cent and in Paris the Cac 40 was down by a similar margin. 

“The trajectories of Covid-19 are likely being contained in Europe but not in a complacent US and the economic damage is severe,” said Sebastien Galy, senior macro strategist at Nordea Asset Management.

Governments this week have rolled out big initiatives designed to cushion the blow from coronavirus, which has caused an economic standstill in parts of Europe, Asia and the US.

But US Treasury secretary Steven Mnuchin warned late on Tuesday that the pandemic could send US unemployment to as high as 20 per cent if Congress does not come up with further measures to boost the economy.

“The jury is still out on whether these measures will help stabilise financial markets,” said Michael Strobaek, chief investment officer at Credit Suisse, who added that investors should stay on the sidelines.