The S&P 500 index of US stocks fell 12 per cent on Monday, a day after an emergency rate cut by the Federal Reserve, as the US and other countries around the world imposed stricter curbs on public activity.
The increasingly aggressive measures to prevent the spread of coronavirus, and their deepening economic impact, sent global shares, oil prices and US government bond yields lower. While investors sought the safety of US Treasuries, European sovereign debt fell in price, sending yields sharply higher.
The S&P 500, the benchmark for the US equity market, lurched lower in the final minutes of trading, eclipsing the worst performance of the pandemic and marking the biggest single-day loss since the crash of October 1987. The tech-heavy Nasdaq Composite had its worst day ever, down 12.3 per cent. The Cboe Volatility index, the market’s “fear gauge”, jumped to a record high.
“The Fed has thrown everything at this. If we are now facing the end of central bank action, it means we are on our own,” said Seema Shah, chief strategist at Principal Global Investors. “There is a fear settling in the market; investors are terrified that this was all that was left.”
The Fed cut US interest rates by a full percentage point on Sunday, restarted its programme of quantitative easing and introduced new measures to improve market liquidity. On Monday, the Group of Seven industrial nations followed up with a promise to do “whatever is necessary” to support the global economy through a period of intensifying disruption.
Shortly before the market close, President Donald Trump urged people in the US against discretionary travel and gathering in groups of 10 or more. Some US authorities went further: San Francisco told people to stay at home except for essential activities and New Jersey imposed a recommended curfew between 8pm and 5am.
Also on Monday, France said people would be allowed to leave their homes only for essential trips, and Canada closed its borders to most foreigners.
Joachim Fels, global economic adviser to Pimco, the asset manager, said markets were concerned about “what currently looks like an inevitable recession . . . turning into a depression, and financial markets [going] from a drawdown to a meltdown”.
In Europe, the UK’s FTSE 100 tumbled 4.7 per cent to its lowest level since 2011 — its year-to-date losses have now spiralled to more than 30 per cent — and the Stoxx Europe 600 index fell 4.9 per cent.
Airline stocks were especially hard hit as carriers grounded most of their fleets and took steps to conserve cash. British Airways parent IAG tumbled 27 per cent in the UK, while US carrier United Airlines was off 15 per cent. Shares in banks also came under intense pressure: Capital One, a leading US credit card issuer, was down 24 per cent; Citigroup fell 19 per cent.
Lower-rated bonds reflected the deteriorating sentiment. BlackRock’s flagship junk bond ETF, known widely by its ticker HYG, was down 5.5 per cent, its worst day since October 2008.
“There is forced selling all over the place,” said Jeffrey Gundlach, chief executive at DoubleLine Capital, blaming investor redemptions and margin calls. “The Fed is not buying stocks or junk bonds and that is where you are seeing massive pressure.”
With the coronavirus outbreak in Europe at its most advanced in Italy, an investor focus has been that country’s government bonds. Spreads above German Bunds — a key measure of country risk in the eurozone — hit the highest level since June last year, with the yield on the 10-year Italian government bond up nearly 38 basis points to 2.16 per cent.
“The idea that the European Central Bank is limited means that fiscal stimulus has to be the way to go [and] fiscal stimulus means more bond issuance,” said Andrew Brenner, head of international fixed income at National Alliance Securities, adding a prediction: “The credit quality of Europe is being strained as everything is closing and GDP will plummet 10 per cent in the short term.”
Oil prices plunged as the pandemic started to hit demand in Europe and North America. Brent crude, the international marker, fell more than 10 per cent to just below $30 a barrel, breaching that level for the first time in four years.
The Fed on Sunday cut US interest rates by a full percentage point to zero and announced emergency measures including the purchase of $700bn of US Treasuries and mortgage bonds.
The Bank of Japan on Monday followed the Fed’s actions by announcing it aimed to double its purchases of exchange traded funds to ¥12tn ($112bn) a year. However, the central bank left its key policy rated unchanged at -0.1 per cent. Japan’s benchmark Topix closed 2 per cent lower after the announcement.
In other Asia-Pacific markets, Australia’s S&P/ASX 200 index was 9.7 per cent lower while Hong Kong’s Hang Seng index fell 4 per cent and China’s CSI 300 closed down 4.3 per cent.
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Reporting by Hudson Lockett in Hong Kong, Leo Lewis in Tokyo, Katie Martin, Philip Georgiadis and David Sheppard in London, Robin Wigglesworth in Oslo and Jennifer Ablan and Colby Smith in New York
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