Global stocks rise on yet more hopes of central bank rate cuts
The Bank of England announced a surprise 50bps cut to tackle the coronavirus shock, with renewed expectation of the same from the ECB
London — European stocks rose on Wednesday after the Bank of England (BOE) joined other central banks in cutting interest rates, raising hopes for more co-ordinated monetary and fiscal stimulus to counter the economic shock from the coronavirus outbreak.
The surprise move from the BOE which — on the day that Britain’s budget is set to open the taps on spending — also announced measures to support bank lending, lifted shares after a lacklustre session in Asia.
Wall Street had rallied significantly on Tuesday, helping reverse some of Monday’s brutal losses, but that failed to translate into improved sentiment on Wednesday as scepticism grew about the stimulus package announced by Washington to fight the epidemic.
By 8.55am GMT, the FTSE 100 had risen 1.73%, the Euro Stoxx was 2.67% ahead, and Germany’s DAX was 2.65% higher.
US stock futures were down 1.2%, though that was up from the 3% losses before the BOE’s 50-basis-point (bps) cut in the base rate to 0.25%. MSCI’s broadest index of Asia-Pacific shares excluding Japan fell 1.05%.
With the US Federal Reserve having already cut rates this month, the pressure is on the European Central Bank (ECB) to act when it meets on Thursday. The BOE did not announce any new quantitative easing but it did launch a new scheme to support lending to small businesses. The UK finance minister is due to present his first annual budget shortly after 12.30pm GMT.
“It is the only thing central banks can do in a public health crisis,” Neil Dwane global strategist and portfolio manager at Allianz Global Investors said. “They are trying to take the shackles off the banks to ensure we don’t get a cash crunch.”
Still, after a decade of extraordinary monetary policy, investors say the impact 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, its problem is that there is even more pressure because they face the third largest eurozone economy — Italy — in dire straits,” Dwane said.
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. It was unchanged in early trading on Wednesday.
Sterling initially fell following the BOE decision before rebounding. It was last up 0.5% at $1.2945 and flat against the euro at 87.49p.
The dollar resumed its decline against the yen, the Swiss franc and the euro, weighed by uncertainty about the US government’s response and the drop in US treasury yields, though the greenback remained significantly above levels seen on Monday. The euro rose 0.3% against the dollar to $1.1315.
Benchmark US 10-year treasury yields fell 4bps to 0.7129%, more than double Monday’s record low yield of 0.3180%.
Market participants largely expect the US Fed to cut interest rates for the second time this month at the conclusion of next week’s regularly scheduled policy meeting, after it surprised investors last week with a 50bps cut.
German government bond yields rose after the BOE cut improved sentiment, while Italian yields — which had shot up on worries the country on the front line Europe’scoronavirus outbreak is sliding into a recession — fell as bets on ECB stimulus grow. Italy is on lockdown in an attempt to slow new infections.
Karen Ward, chief market strategist for Europe, the Middle East and Africa at JPMorgan Asset Management, said all eyes are now on the UK finance minister to see if he announces a big increase in spending. “If he does it would be the first instance of a truly co-ordinated monetary and fiscal push. 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.
US crude reversed earlier gains and dropped 0.7% to $34.23 a barrel, while Brent crude slipped 0.21% to $37.14 after Saudi Aramco said it had been directed by the energy ministry to raise its production capacity.
On Monday, the oil market plunged with futures recording their largest percentage drop since the 1991 Gulf War as Saudi Arabia and Russia clashed openly over management of supply.
Spot gold, which is often bought as a safe-haven during times of uncertainty, rose 0.54% to $1,657 an ounce.