US stocks rose on Monday after volatile trading in Europe driven by expectations that central banks and governments are preparing to deliver support to soften the economic impact of the global coronavirus outbreak.
The S&P 500 gained 2 per cent, having declined in the previous eight trading sessions. The Nasdaq Composite and Dow Jones Industrial Average – the other key US benchmarks – jumped by a similar degree. T he Iseq also pulled back some lost ground.
Swelling expectations for central bank rate cuts sent the yield on the benchmark 10-year US Treasury bond toward a record low on Monday, just above 1 per cent. Yields fall when prices rise.
Rally
European stocks flicked back into positive territory as US markets began trading, shaking off steep earlier declines. The broad Stoxx 600 index was 0.2 per cent higher, while the FTSE 100 was up by 1.4 per cent. Asian stocks rallied overnight, with China’s CSI 300 index closing up 3.3 per cent in its best one-day performance since May.
The latest wave of buying came after newswires reported that finance ministers from major economies will speak on Monday, alongside their respective central bank governors, to discuss their response to the crisis. French finance minister Bruno Le Maire said the response would be "as co-ordinated as possible". Italy has already said it would inject €3.6 billion into its economy to mitigate the impact.
“What has happened over the day is that investors have realised that monetary policy is not going to make a difference,” said Kasper Elmgreen, head of equities at Amundi. “What could make more of a difference is if governments started a significant fiscal expansion.”
Traders are seeking to determine how far central banks and governments 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.
Support
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".
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 added 4 per cent to $51.69 a barrel. – Copyright The Financial Times
