• Friday, March 29, 2024
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European markets slide despite signs of coronavirus support

European markets slide despite signs of coronavirus support

European markets lurched lower on Monday despite signs that key central banks are preparing to deliver monetary support in an effort to soften the economic impact of the global coronavirus outbreak.
Asian stocks rallied overnight, with China’s CSI 300 index closing up 3.3 per cent in its best one-day performance since May. But an early pick-up in Europe quickly fizzled out, with London’s FTSE 100 index turning a 0.9 per cent gain into a 1 per cent decline. Similarly, Germany’s Dax index dropped 2 per cent.
The choppy moves reflect traders’ efforts to determine how far central banks can prop up financial markets, which last week suffered a heavy decline while the disease, which originated in China, spread more forcefully around the world.

The Bank of England said it was working with the Treasury, the Financial Conduct Authority and its international partners “to ensure all necessary steps are taken to protect financial and monetary stability”.
The Bank of Japan also vowed to fight the economic effects of coronavirus. In an emergency statement, governor Haruhiko Kuroda promised to inject liquidity into markets and hinted at raising asset purchases, indicating the central bank is moving into crisis mode.
The US Federal Reserve has also hinted at support, signalling that it was prepared to consider cutting rates in response to the virus’s “evolving risks”.
Bond markets climbed at the prospect of more monetary support, with the yield on US 10-year government debt sliding by 0.1 percentage points to a record low of 1.06 per cent. Yields fall when bond prices rise.

“While the path for risky assets will be determined by the degree of activism on the part of global policymakers . . . the outlook for safe havens is unequivocally positive as either aggressive rate cuts provide support, or a perceived insufficient policy response underpins a flight-to-quality bid,” wrote analysts at Rabobank. They added that they see “a discernible near-term possibility” that the yield on the US 10-year note could drop below 1 per cent.
But economists and market analysts say it is hard to determine how much monetary support would alleviate the pressure. “Central banks cannot cure the virus. They cannot force people to spend,” said Paul Donovan, chief economist at UBS Global Wealth Management. “However, central banks can help companies with cash-flow problems, or whose debt service costs are challenging if demand weakens. Central banks exist to solve liquidity and credit problems, should those arise.”

Any optimism over the prospect of co-ordinated international action to fight the disease was tempered as the OECD warned global growth could halve this year from its previous forecast, and by Chinese manufacturing data that showed factory activity in February plunging to an all-time low.
Brent crude was initially buoyed, with the international oil marker adding almost 3 per cent, before dropping back to trade up 1 per cent at $50.16 a barrel.
Governments are taking action to support their economies during the coronavirus crisis. Italy said it would inject €3.6bn into its economy to mitigate the impact.