Global stocks, oil prices and European bonds tumble 

Global stocks, oil prices and European government bonds fell sharply on Wednesday, indicating forced selling across financial markets and 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 over 15 per cent to $23 a barrel, a 17-year low. Brent, the international benchmark, dropped 9 per cent to a 13-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 opening talks with Congress on a $1tn fiscal stimulus package.

The S&P 500 index was 6 per cent lower in late-morning trading in New York, and the tech-heavy Nasdaq Composite was down almost 5 per cent.

“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.

Investors scrambled to snap up US Treasuries in a bid for safety, sending the yield on the benchmark 10-year bond down 0.8 percentage points to below 1 per cent at one point. Meanwhile, the more policy-sensitive two-year note saw its yield fall 0.6 percentage points to 0.43 per cent.

European government debt was not in demand on Wednesday, however, and yields 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.

“This is fire-selling of liquid assets by those who need to meet redemptions,” said Mike Riddell, a portfolio manager at Allianz Global Investors. “A lot of people need cash and they’re liquidating the only thing that they can.”

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 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 at one point, 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 that the prospect of a big increase in bond issuance in the US and Europe to fund efforts to tackle the health crisis was further 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.

“Investors are getting comfortable with the idea that a deluge of supply is coming, ” said Mr Sen.

Sterling also slumped under $1.20 — a level it has not breached consistently since the 1980s.

“It’s not necessarily something that makes economic sense,” said Peter Schaffrik, global macro strategist at RBC Capital Markets. “It’s just investors doing what they need to do.”

Line chart of  showing US 10-year Treasury yield in March

London’s FTSE 100 deepened its declines through the trading day to fall over 4 per cent 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 per cent 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.

In volatile trading in Asia-Pacific on Wednesday, Australia’s S&P/ASX 200 slid 4.8 per cent as Scott Morrison, prime minister, warned that the crisis could disrupt life in the country for up to six months. Hong Kong’s Hang Seng index fell 4.2 per cent while China’s CSI 300 slipped 2 per cent.

The Japanese yen gained ground as stocks sold off, rising 0.3 per cent to ¥107.3. Traders in Tokyo and Hong Kong said they were treating all moves with caution given that correlation across global markets was at its highest in a decade.

“The markets are seeing real signs of government and central bank stimulus and that was always eventually going to get a response. The issue you have, though, is that nobody is taking a long-term view of this market,” said one Tokyo-based trader. “My hedge fund clients are basically turning into day-traders because nobody wants to run a big book overnight.”


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