Financial news

Asian and European stocks stabilise after Wall Street sell-off

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Via Financial Times

Asian and European stocks stabilised on Tuesday after a heavy Wall Street sell-off that came despite an emergency rate cut by the Federal Reserve aimed at stopping US economy sliding into recession.

Asian stock markets struggled for traction as investors sought signs of further stimulus measure.

The main stock benchmarks in Japan, mainland China and Hong Kong were little changed in early afternoon trading on Wednesday. European stocks were on course to record moderate gains at the open, with futures pointing to a rise of 0.2 per cent for London’s FTSE 100 and a 0.3 per cent gain for the Dax in Frankfurt.

The US central bank overnight made an unscheduled decision to cut the federal funds rate by half a percentage point in response to the growing threat to the global economy from the coronavirus. 

Wall Street responded by selling off, with the S&P 500 index falling 2.8 per cent and the 10-year US Treasury yield dropping below 1 per cent for the first time. Trading in Fed funds futures indicates that investors are now betting the Fed policy committee will cut rates again at its scheduled meeting later this month.

Futures trading in Asia pointed to a rebound of 1.2 per cent for the S&P 500 when Wall Street opens on Wednesday. 

Results in voting on ‘Super Tuesday’ in the US — the biggest primary day for Democratic presidential contenders — pointed to a strong performance by Joe Biden and a disappointing showing for Bernie Sanders, a candidate who investors view as less market friendly. The yield on 10-year US Treasuries fell another 3 basis points to 0.968 per cent.

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Some analysts predicted the Fed’s move could prompt a wave of monetary and fiscal easing measures across Asia. 

In South Korea, the Kospi gained 2.2 per cent on Wednesday after the country’s finance minister proposed extra spending of almost $10bn to blunt the outbreak’s impact. On Tuesday, Australia’s central bank cut rates to a new all-time low; on Wednesday the S&P ASX/200 fell 1.7 per cent to close at a six-month low.

Traders were also looking to potential stimulus measures in China, where the Covid-19 virus originated and is home to the most cases.

Yields on China’s sovereign bonds fell 7 basis points to a four-year low of 2.678 per cent in anticipation of new easing measures. Yields fall as prices rise. 

China’s onshore renminbi exchange rate climbed 0.3 per cent against the US dollar to Rmb6.9362.

Becky Liu, head of China macro strategy at Standard Chartered, said the prospect of any co-ordinated easing by G7 nations would pressure Beijing to cut rates more quickly to prevent the renminbi from strengthening too much.

Ms Liu said the central bank was likely to cut short- and medium-term rates by another 10 basis points in mid- to late March, but added this “may be followed by a benchmark deposit rate cut at a later stage”. That would lower banks’ funding costs considerably and mark China’s first cut to deposit rates since 2015.

Iris Pang, greater China economist at ING, said the People’s Bank of China may also implement a 0.5 percentage point targeted cut to the amount of reserves commercial banks are required to hold.

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But Ms Pang questioned the effectiveness of monetary policy in combating the outbreak’s economic damage. Monetary easing “actually can’t cure the disease . . . even if your currency is soft or strong it doesn’t help exports or hurt them because the supply chain is broken,” she added.

She said the PBoC’s loan repayment extension and low-interest rate schemes, which target small companies hit hardest by the outbreak and measures to contain it, were more important for supporting China’s economy.

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