A traders works during the opening bell at the New York Stock Exchange, New York, the US, March 19 2020. Picture: JOHANNES EISELE / AFP
A traders works during the opening bell at the New York Stock Exchange, New York, the US, March 19 2020. Picture: JOHANNES EISELE / AFP

Washington — European and US stocks climbed on Thursday, recovering from earlier losses, as central banks worldwide moved to stem a coronavirus-induced financial rout in moves that boosted bonds and provide more access to the dollar.

The US Federal Reserve opened the taps for central banks in nine countries to increase the availability of dollars for contracts made in the US currency in hopes of loosening particularly tight bond markets.

The Fed said the swaps, in which the US central bank accepts other currencies as collateral in exchange for dollars, will be in place for at least the next six months.

The swaps will allow the central banks of Australia, Brazil, South Korea, Mexico, Singapore, Sweden, Denmark, Norway and New Zealand to tap a combined $450bn to help ensure the world's dollar-dependent financial system functions.

“All these things kind of happening at once causes a lot of dominoes to fall, and as the dominoes fall, it creates more demand, pushing people towards the dollar,” said Michael Skordeles, US  macro strategist at Truist/SunTrust Advisory Services in Atlanta.

“This (the dollar swap lines) is going to help, but it's not a silver bullet,” he said. “Because there's a flow of capital into dollar-denominated assets, in particular US Treasuries, it's starving these countries of liquidity and making the dollar appreciate.”

The Mexican peso has slumped about 30% against the dollar since a month ago, when Wall Street began to slide by about the same amount on pandemic fears.

The pan-European Stoxx 600 closed up 2.9%. Telecom stocks jumped 5% to lead gains while basic resources fell 0.4%.

On Wall Street, the Dow Jones Industrial Average gained 1% to finish the session at 20,087.40, after swinging more than 1,200 points during the day. The broad-based S&P 500 climbed 0.5% to close at 2,409.40, while the tech-rich Nasdaq Composite Index jumped 2.3% to end at 7,150.58, as large technology companies led the market. 

MSCI's world equity index gained 0.09%.

The stock market meltdown, triggered by worries over the coronavirus outbreak, has pushed Wall Street's three main indexes down about 30% from their record closing highs last month and has almost erased the Dow Industrials' gains since US President Donald Trump's 2017 inauguration.

The dollar index, which measures the greenback's strength against a basket of six other major currencies, rose 2% to 102.73, its highest level since January 2017. The index is up about 4% for the week.

The euro was 2.15% lower against the dollar. Against the Swiss franc, the greenback was up 1.9%, while it gained 2.63% against the yen. 

After the close the rand had weakened 0.41% to R17.2400/$. 

The Bank of England cut interest rates to 0.1%, its second emergency rate cut in just over a week.

The British pound climbed, reversing after slipping past the previous day's trough to the lowest since 1985.

Bond markets stabilised somewhat after the European Central Bank (ECB) pledged late on Wednesday to buy €750bn in sovereign debt through 2020.

That brought the ECB's planned purchases for this year to €1.1-trillion, with the new purchases alone worth 6% of the eurozone's GDP.

Italian yields fall

Government bond yields in Italy and across the eurozone dropped after the ECB's emergency measures, though European stocks fell back into negative territory after arresting their rout in early trading.

Expected price swings for some of the world's biggest currencies rocketed to multiyear highs as the demand for dollars forced traders to dump currencies across the board.

For the British pound vs the dollar, expected volatility gauges leapt to 24.4%, their highest level since before the 2016 Brexit vote.

“One unresolved and really critical issue is what's going on in volatility,” said Andrew Sheets, chief cross-asset strategist at Morgan Stanley. “I think that volatility needs to stabilise before the broader market can heal.”

Italy, which has seen its borrowing costs jump in recent days, led the drop in yields after the ECB move.

Its two-year bond yields slumped by than 100 basis points to 0.41%, heading for their biggest one-day fall since 1996. Italy's 10-year bond yields slid as much as 90 bps to 1.40%.

The gap over the safer German Bund's yields tightened almost 100 bps from Wednesday's closing levels and were set for the biggest daily drop since the 2011 euro one crisis.

Markets elsewhere failed to respond to central bank action.

Before the ECB move, the US Federal Reserve promised a liquidity facility for money market mutual funds and the Bank of Japan made two unscheduled bond purchases totalling ¥1.3-trillion ($12bn).

The Australian central bank slashed interest rates to a record low of 0.25%.

The SA Reserve Bank cut interest rates by 100 basis points to  5.25% as it dramatically revised the inflation and growth forecast, saying GDP for the whole of 2020 would contract 0.2%. 

Traders reported huge strains in bond markets, however, as distressed funds sold any liquid asset to cover losses in stocks and redemptions from investors.

Benchmark 10-year sovereign bond yields in New Zealand, Malaysia, Korea, Singapore and Thailand surged as prices fell, and US 10 year Treasuries rose 10 basis points through the session.

Gold dropped 0.31%, and like other assets was buffeted by volatility. Copper hit its down-limit in Shanghai, and benchmark futures traded in London fell to their weakest in mor than four years.

Oil jumped after an overnight plunge to an 18-year low in Asian trade, though coronavirus fears capped gains. Brent surged nearly 8% to $26.82

Reuters