US stocks dropped and Treasury yields touched record lows, as investors ramped up bets the Federal Reserve will cut its main policy rate by another half percentage point at its meeting this month.

The S&P 500 lost about 3.4 per cent, with bank shares leading the declines, erasing much of the previous day’s gains. The Dow Jones Industrial Average slid 3.6 per cent, while the Nasdaq Composite fell 3.1 per cent.

Investors scooped up Treasury securities as protection against the economic impact of the spreading coronavirus, sending yields to record lows.

The yield on the 30-year Treasury bond tumbled 16 basis point to a new low of 1.54 per cent, while the 10-year Treasury yield fell as much as 15 basis point to another record low of 0.897 per cent, before edging slightly higher. The policy-sensitive two year note yielded 0.59 per cent, down 11 basis points.

The pressure for further action by the Fed — which cut its policy rate by 50bp on Tuesday — was evident in the futures markets. Investors on Thursday were fully pricing in a 50bp cut when Fed policymakers gather March 17-18 and another 25bp reduction in April.

“Eventually, additional actions to support banks and ensure ample liquidity across the banking sector may be needed, said Tiffany Wilding, US economist at Pimco. “The Fed may need to do more where it can if bank funding market stresses flare up.”

Bank shares were hit hard as fears rose that the yields on their bond portfolios would fall more than their deposit costs, compressing profit margins. Bank of America and Citigroup were off by more than 5 per cent, while JPMorgan lost just shy of 5 per cent. US bank stocks have now shed nearly a fifth of their value since February.

Mike Mayo, bank analyst at Wells Fargo, said he had slashed his earnings forecast for the sector by 10 per cent and warned of a potential 25 per cent decline if conditions worsen

“We are all bond analysts now,” he said. “It’s a buyer strike out there.”

In Europe, the composite Stoxx Europe 600 closed down 1.4 per cent, with investors unwilling to build on gains in Asia, where Chinese shares hit a two-year high. London’s FTSE 100 fell 1.6 per cent, while Germany’s Dax was 1.5 per cent lower.

“Stock markets are unlikely to see a sustained rebound until the spread of the coronavirus epidemic slows,” said Jonas Goltermann, senior economist for Capital Economics.

Companies from retail to financial services have spelt out the disruption to their businesses resulting from the coronavirus outbreak. On Thursday, the airline industry warned it could face a revenue hit of more than $100bn

“Investors continue to struggle to find the correct balance,” said Richard McGuire, head of rates strategy at Rabobank. He pointed to the tension between the fundamental concerns thrown up by the virus and the “growing appeal of risky assets in the wake of an unfolding global policy response”.

Going against the trend, China’s CSI 300 index of Shanghai- and Shenzhen-listed shares added 2.2 per cent on Thursday to close at a two-year high. The index is the world’s best performing major stock market this year, up nearly 3 per cent, as most other big global indices languish in the red. 

Analysts at Mizuho said comments from President Xi Jinping at a politburo meeting this week implied Beijing “had not yet given up” on its goal of doubling gross domestic product from 2010 by 2021. That would require growth of 5.6 per cent this year, they added, and lent credence to expectations of a “massive stimulus package” later in the year to make up for a collapse of growth in the first quarter.

Hong Kong’s Hang Seng gained 1.9 per cent. Australia’s S&P/ASX 200, which fell sharply in the previous session, rose 1.1 per cent. Japan’s Topix was 0.9 per cent higher.

Oil prices fell, with international crude marker Brent slipping 2.3 per cent to $49.97 a barrel.

Additional reporting by Robert Armstrong in New York

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