Picture: 123RF/IQONCEPT
Picture: 123RF/IQONCEPT

London — The rebound in stocks ran out of steam on Wednesday despite the Bank of England (BoE) joining other central banks in cutting interest rates, as investors weighed up whether co-ordinated monetary and fiscal stimulus could counter the shock from coronavirus.

The surprise move from the BoE, which — on the day that Britain's budget opened the taps on spending — also announced measures to support bank lending, initially lifted shares after a lacklustre session in Asia.

Wall Street had rallied sharply on Tuesday, helping to reverse some of Monday's brutal losses, but that did not translate into improved sentiment on Wednesday as scepticism grew about the stimulus package announced by the US to fight the epidemic.

By 11am GMT, European stock gains had fizzled out as caution set in. The FTSE 100 fell 0.4% after earlier being up more than 1%, the Euro Stoxx was 0.09% lower and Germany's DAX down 0.06%.

US stock futures dropped 3.32%.

As of Tuesday's close, $8.1-trillion in value has been erased from global stock markets in the recent rout.

The MSCI all-country index has lost more than 15% of its value since it peaked on February 12, and was 0.38% lower on Wednesday.

With the US Federal Reserve having already cut rates this month, the pressure is now on the European Central Bank to act when it meets on Thursday.

“It is the only thing central banks can do in a public health crisis,” said Neil Dwane, global strategist and portfolio manager at Allianz Global Investors. “They are trying to take the shackles off the banks to ensure we don't get a cash crunch.”

The BoE, which cut rates by 50 basis points to 0.25%, did not announce new quantitative easing measures but it did launch a new scheme to support lending to small businesses. The UK finance minister began presenting his first annual budget shortly after 12.30pm GMT.

Italy, which is in lockdown in an attempt to slow new infections, earmarked $28.3bn to soften the economic effect.

After a decade of extraordinary monetary policy, investors say the effect of easier policy has clear limits and increased government spending must bear the brunt of the policy response to the economic consequences of the outbreak.

“For the ECB their problem is that there is even more pressure because they face the third-largest eurozone economy — Italy — in dire straits,” Dwane said.

A key gauge of long-term eurozone inflation expectations dropped to another record low on Wednesday, in what analysts said suggested investors were positioning for deflation risks.

Declining dollar

The pound initially fell sharply following the BoE decision before rebounding. It was last up 0.5% at $1.2938 but down 0.3% vs the euro at 87.67 pence.

The dollar resumed its decline against the yen, the Swiss franc and the euro, weighed down by uncertainty about the US government's response and the drop in US treasury yields. The greenback remained significantly above levels seen on Monday, however.

Benchmark US 10-year treasury yields fell seven basis points to 0.684%, still more than double Monday's record low yield of 0.3180%.

Market participants largely expect the Fed to cut rates for the second time in March at next week's scheduled policy meeting, after it surprised investors with a 50-basis-point cut last week.

German government bond yields rose after the BoE cut supported sentiment, while Italian yields — which had shot up on worries the country with Europe's worst outbreak of the virus is sliding into a recession — tumbled as much as 20 basis points as bets on ECB stimulus grow.

Karen Ward, chief market strategist for EMEA at JPMorgan Asset Management, said all eyes were now on British finance minister Rishi Sunak, who announced a big rise in spending to help businesses and households through the coronavirus epidemic.

“Investors may be comforted by the fact that policymakers are willing to deploy their full ammunition — moving a step closer to helicopter money,” she said.

A radical argument for fiscal policy to create money and hand it out to the public is sometimes referred to as “helicopter money”.

US crude slid 3.67% to $33.09 per barrel, while Brent crude dropped 3.9% to $35.77 after Saudi Aramco announced plans to raise its production capacity at the same time as the coronavirus was set to weaken demand.

On Monday, oil prices plunged after the collapse of co-ordinated output cuts by Saudi Arabia, Russia and others.

Spot gold rose 1% to $1,665/oz as investors sought safety in the precious metal.


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