Stocks slide and bonds hit new highs on coronavirus fears
Government bond prices raced to new historic highs on Friday while stocks across the globe tumbled on fears over the cascading economic disruption caused by the spread of the coronavirus.
With haven assets in high demand and traders raising their bets on the US Federal Reserve cutting interest rates again, the yield on 10-year government debt briefly fell below 0.7 per cent — a new record low. Yields stood at 1.9 per cent at the start of this year. UK and German government bonds also hit records.
Yields on the US 10-year have tumbled by more than 0.3 percentage points in each of the past two weeks, their biggest such moves since the height of the 2008-09 financial crisis. Yields fall when prices rise.
Meanwhile, European stocks slid, with London’s FTSE 100 shedding 3.3 per cent and Frankfurt’s Dax down 3.6 per cent in some of the most significant selling action since the outbreak of the coronavirus began rattling global markets last month.
The Stoxx 600 index, which tracks the region’s leading companies, was on track for its third consecutive week of declines and is now down almost 9 per cent since the start of the year as concerns rise about the health of companies’ balance sheets as well as their earnings.
“There has been a morphing of this crisis from earnings downgrades due to Covid-19 impacts to the potential for it to be a credit crisis,” said Alan Custis, head of UK equities at Lazard Asset Management.
The cost of insuring against the default of some of Europe’s biggest corporate borrowers had “blown out” over the past couple of days and “investors are now treating companies with leverage with a lot of caution”, he added.
Futures trading showed US stocks heading for another significant fall on Wall Street, with the S&P 500 expected to drop about another 2 per cent after tumbling on Thursday as concerns over the spread of coronavirus swept through markets.
Some analysts advised keeping cool heads. “Don’t give in to panic,” said Alain Bokobza, a strategist at Société Générale. “We do not recommend switching away from a balanced [portfolio] allocation at this stage. Policymakers have clearly entered the race, which should prevent — for now — an extended bear market on risk assets.”
The Fed earlier this week cut interest rates by half a percentage point following an emergency meeting. Futures markets have priced in another half-point reduction when Fed policymakers meet on March 17-18. They imply a 68 per cent chance there will be a further quarter-point cut at the central bank’s April meeting.
Brent crude, the international oil benchmark, fell almost 5 per cent to move further below $50 a barrel, trading around its lowest level in three years as Opec and Russia sat down for crunch talks in Vienna over how to respond to the coronavirus.
Gold was heading for its biggest weekly gain since 2016 as investors looked for safe places to store their cash. The metal, which has advanced almost 6 per cent since Monday, has also been boosted by the collapse in government bond yields to historic lows.
“Markets are struggling to balance the competing forces of more extensive virus containment measures, and of monetary and fiscal stimulus,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.
China’s CSI 300 index dropped 1.5 per cent, bringing it down from the two-year high notched on Thursday. Still, the index of Shanghai and Shenzhen-listed stocks recorded its best week in a year as investors prepared for more relief measures from Beijing. Japan’s Topix index earlier fell 2.9 per cent as the yen, seen as a haven during times of uncertainty, strengthened 0.9 per cent to touch a six-month high of ¥105.20 per dollar.
The Asian Development Bank warned on Friday that disruption from the virus could lop 1.7 per cent off China’s economic growth in a worst-case scenario and bring down global gross domestic product by as much as 0.4 per cent.
Investors are also concerned about how coronavirus outbreaks in Japan and South Korea will hit two of Asia’s biggest economies. S&P Global Ratings on Friday forecast that the coronavirus would blow a $211bn hole in regional economies this year, cutting Asia-Pacific’s annual growth rate to the lowest level since the global financial crisis.