An emergency rate cut by the Bank of England helped to bring a dash of optimism to European markets on Wednesday morning even as a pledge by Saudi Arabia to boost its crude production capacity knocked oil prices.
The Europe-wide Stoxx 600 added 1.2 per cent in early trading, while in London the FTSE 100 was up 0.7 per cent. The gains came after the UK’s central bank said it would reduce its main rate by half a percentage point to 0.25 per cent and introduced a host of to measures to keep credit flowing to businesses.
Paul Dales, chief UK economist at Capital Economics, said the bank’s Monetary Policy Committee had “pulled the trigger on its double-barrelled shotgun” and that while the move would not stop the economy stagnating or contracting in the second and third quarters, “it will help to ensure that the economy can bounce back . . . once the virus has peaked.”
Other European stock markets, which have been under significant pressure in recent days, also made gains. In Germany, the Dax 30 added 1.8 per cent, as did France’s Cac 40.
The rise in equities came despite a fall in the price of oil after Saudi Aramco announced it would increase its oil production capacity from 12m to 13m barrels per day, marking a further escalation of the kingdom’s price war.
Brent crude, the international benchmark, was down 1.9 per cent at $36.47 and US marker West Texas Intermediate fell 2 per cent to $33.67. Both benchmarks had been up more than 5 per cent earlier in the day. Oil prices crashed by more than a quarter on Monday after Saudi Arabia launched an oil price war.
Unease over this week’s collapse in the oil price and growing signs of the global spread of the coronavirus have continued to weigh on equity markets in spite of the action taken by both the Bank of England and the US Federal Reserve.
Despite the climb in Europe, futures trading pointed to a 1.9 per cent fall for the S&P 500 when Wall Street opens later on Wednesday. Overnight, the US benchmark ended a volatile session 4.8 per cent higher.
The White House on Tuesday pushed for a payroll tax cut as part of a “very dramatic” stimulus package previously promised by US President Donald Trump. Democrats voiced opposition to the cut, casting doubt on the prospects of a quick shot in the arm for the US economy.
Louis Tse, managing director at Hong Kong’s VC Asset Management, said the lack of detail on the stimulus plan had extinguished what little investor optimism there was. “The market is still in a very jittery mood,” he said.
Haven assets also rallied on Wednesday, signalling that investors were becoming more risk averse. Yields on 10-year US Treasuries dropped 4 basis points to 0.717 per cent, though still comfortably above recent lows. Yields fall when prices rise. Japan’s yen, which often serves as a haven during market tumult, strengthened 0.4 per cent to ¥105.24 against the dollar.
“There is a very grim sense of foreboding . . . the real risk is that, in the coming weeks, we start to see redemptions from some of the big long-only funds pushing entire markets lower,” said one Tokyo-based broker. Tokyo’s benchmark Topix fell 1.5 per cent.
Analysts warned against panic selling. “One of the risks in turbulent market conditions is being forced to sell assets to meet liquidity needs,” said Mark Haefele, chief investment officer, UBS Global Wealth Management, noting that offloading assets in a weak market locks in losses for the longer term.
Stock markets elsewhere in Asia-Pacific were also weaker. Australia’s S&P/ASX 200 fell 3.6 per cent even after the government announced a $1.6bn health package to combat the spread of coronavirus. Hong Kong’s Hang Seng slipped 0.6 per cent, while China’s CSI 300 dropped 1.3 per cent lower.