Global stocks, government bonds and oil prices rose on Thursday in response to a flurry of emergency packages from central banks intended to buffer economies and financial markets from the conoravirus pandemic.
The European Central Bank, the US Federal Reserve and the Bank of England all intervened after investors around the world sold what they could this week to raise cash, sending stocks lower, interest rates higher and pumping up the US dollar.
The result on Thursday was relative stability, with stocks rallying, government bond yields coming down, oil spiking from the lowest levels in at least 17 years and sterling trading relatively flat after a stomach-churning 4 per cent drop on Wednesday.
“Clearly markets have been soothed today by central banks bending over backwards to show they are willing to do anything to support markets and the economy,” said Kristina Hooper, chief global market strategist at Invesco. “And I don’t believe they are done. But markets will be looking to policymakers to ensure adequate fiscal stimulus is provided as well.”
The US equity benchmark S&P 500 ended up about half of 1 per cent in volatile trading after falling 3 per cent when markets opened, while the Europe-wide Stoxx 600 composite gained 2.9 per cent. London’s FTSE 100 was 1.4 per cent higher after falling nearly 2 per cent earlier in the day.
The US oil benchmark West Texas Intermediate crude rose 25 per cent to $25.34 a barrel, the biggest one-day gain on record. Brent, the international benchmark, gained 12 per cent to $28.22 barrel.
The ECB kicked off the policy action on Wednesday night, announcing a plan to buy €750bn in bonds. The Fed followed on Thursday by broadening dollar swap lines to ease a shortage of dollars overseas, and supporting market funds that are important buyers of commercial paper issued by corporations for working capital.
Finally, the BofE cut interest rates to 0.1 per cent and expanded its quantitative easing programme by £200bn to £645bn
“Financial conditions have [been] significantly tightened by corporate credit spreads and volatility going up — that’s why you have these aggressive actions from central banks around the world,” said Bill Campbell, co-portfolio manager of the DoubleLine Global Bond Fund. “They are trying to keep markets stable and borrowing costs low for corporations and citizens.”
As governments increase spending to help blunt the economic impact from the coronavirus, they will have to issue more government bonds to pay for this stimulus. The glut of debt threatens to raise borrowing costs, and government bond yields had jumped in recent days as investors prepared for a potential tidal wave of borrowing.
“All of the major central banks are getting ahead of rising yields, including increasing their QE (Quantitative Easing) programs, and doing whatever it takes with their bold actions to keep these rates down, as to keep corporations and consumers as liquid as possible,” Mr Campbell said.
Italian and Spanish debt soared in price following the ECB’s move, sending yields sharply lower. The rally in Italy’s debt was particularly vigorous, sending the 10-year BTP yield tumbling 0.46 percentage points to 1.84 per cent. That left the debt on track for its biggest daily rally in nine years.
US Treasuries were also in demand and the yield on the 10-year note dropped almost 19 basis points at one point before trimming some of that move to be down 7bp at 1.19 per cent.
Marco Wagner, economist at Commerzbank, said the ECB had unpacked a “new bazooka” in its fight to prop up the euro area. “This will help the bonds of highly indebted countries,” he said.
Sterling stabilised on the BofE news to trade flat around $1.16, after having tumbled 4 per cent on Wednesday amid the broader scramble for dollars and questions over the health of the UK economy as London prepares for lockdown.
The pound has lost more than 12 per cent of its value against the dollar in less than a month, falling to its lowest levels since the 1980s.
The broader rush into the US dollar continued on Thursday. The dollar index, which measures the world’s reserve currency against a basket of peers, jumped as much as 1.5 per cent and was trading at its highest levels in three years.
Zach Pandl, currency analyst at Goldman Sachs, said the dollar’s rise “reflects the unique role the currency plays in the global economy and financial system, rather than a view among investors that the US economy is better placed to weather the coronavirus shock”.
Concerns about the dollar squeeze have grown as the pandemic piles pressure on corporate balance sheets.
Mansoor Mohi-uddin, a currency analyst at NatWest Markets, said the economic stress from the squeeze was spreading. The virus had exposed the risks created by a more than doubling in dollar-denominated corporate debt to $12tn since the 2008 global financial crisis, he said.
“That is a huge amount of dollar debt that companies need to fund. The banks are also struggling to find dollars in the wholesale market.”
Gold, a supposed haven asset in times of stress, was under pressure, reaching a three-and-half-month low of $1,473 a troy ounce as investors continued to liquidate positions.
South Korea’s finance ministry on Thursday announced it would create funds to stabilise bond and stock markets after the Kospi index plunged more than 8 per cent, triggering a temporary trading halt. Hong Kong’s Hang Seng fell 2.6 per cent and Australia’s S&P/ASX 200 closed 3.4 per cent lower.
In Japan, the Topix index closed 1 per cent higher on reports that the government was preparing a stimulus package worth ¥30tn.
Additional reporting by David Sheppard and Neil Hume in London