The world’s most powerful central bank, the US Federal Reserve, is preparing a fresh attempt to shore up investor confidence despite a late rally on Wall Street on Friday that ended a torrid week for stock markets on a more positive note.
Fresh pledges of help from China, Germany and the European commission combined with Donald Trump’s declaration of a national emergency over coronavirus to reassure investors after an ordeal for equities on both sides of the Atlantic that echoed the depths of the banking crisis.
On Wall Street, the S&P 500 closed 9% higher after Trump’s move, although it was still down almost 9% since Monday. This week started with concerns that the Covid-19 outbreak would bring an end to the sluggish recovery of the past decade and hit company earnings.
A day after its worst single trading session since 1987, the FTSE 100 closed up 2.5%, a rise of 129 points to 5,366. Three weeks ago, it closed at 7,404.
Despite the surge late on Friday, Wall Street is now braced for the Fed to step up its response to the threat posed to the global economy by the pandemic when it meets in Washington on Wednesday.
The US central bank is expected to cut interest rates by at least half a percentage point and announce a fresh wave of the money-creation programme known as quantitative easing as it seeks to revive confidence among traumatised investors.
Some analysts predicted that the Fed could go for a full one point off US borrowing costs – currently running in a range of 1% to 1.25% – amid fears that growth in the world’s biggest economy could collapse over the coming months as more Americans are infected with the virus.
Trump, who triggered Thursday’s market mayhem – also the worst day on Wall Street since 1987 – by imposing an EU travel ban, stepped up pressure on the Fed chairman, Jerome Powell, to act.
“The Federal Reserve must FINALLY lower the Fed Rate to something comparable to their competitor Central Banks,” the president tweeted. “Jay Powell [the Fed’s chair] and group are putting us at a decided economic & physiological disadvantage. Should never have been this way. Also, STIMULATE!”
The Federal Reserve must FINALLY lower the Fed Rate to something comparable to their competitor Central Banks. Jay Powell and group are putting us at a decided economic & physiological disadvantage. Should never have been this way. Also, STIMULATE!
— Donald J. Trump (@realDonaldTrump) March 13, 2020
The spread of Covid-19 from China to the rest of the world has made analysts far gloomier about global economic prospects.
Capital Economics, a UK-based consultancy, said: “Now that the coronavirus has become a pandemic, the costs to the world economy have risen significantly. Our revised forecasts now include recessions in the eurozone and Japan. The US will teeter on the brink of one too.”
The consultancy said it was pencilling in global output falling by 1.2% quarter-on-quarter in the first three three months of 2020, led by contractions in Asia. “This is not far short of the 1.6% drop in world output seen at the depth of the global financial crisis in the fourth quarter of 2008,” it added.
Germany spearheaded Europe’s response to the economic damage caused by the coronavirus crisis when it announced “unlimited” aid to see businesses through the difficult times ahead.
The government unleashed an initial €550bn (£500bn) in government-backed loans, which the economy minister, Peter Altmaier, said was “just for starters”.
Meanwhile, the head of the European commission, Ursula von der Leyen, has described the coronavirus as “a major shock” to Europe’s economies, as she promised a multi-billion euro fund to handle the fallout. In Europe, stock markets staged a minor recovery, but failed to recover their losses of the past week.
The Stoxx 600, Europe’s benchmark index, on Thursday endured a record fall of 11.48%. On Friday shares on the Stoxx gained 1.4%, with Germany’s Dax index rising 0.8% and France’s Cac 40 gaining 1.8%.
A day after plunging by a record 17%, the FTSE MIB in Milan regained 7% as Italy – the European country worst affected by Covid-19 – banned short selling on a number of listed companies, including Juventus and Lazio football clubs. Spain imposed similar restrictions, and its Ibex index initially rose strongly, before moderating to an increase of 3.7%.
Oil prices also recovered before falling steeply, with Brent crude futures rising before slumping back to $34 a barrel. Analysts polled by Reuters have drastically cut their average forecasts for oil prices over the course of the year, from above $60 a barrel to only $42, amid a price war between Saudi Arabia and Russia.
More central banks on Friday moved to try to prop up their economies. The People’s Bank of China said it would lower the amount of cash that banks lending to businesses needed to hold in an effort to stimulate more loans. The Bank of Japan also promised to boost liquidity in markets used for bank financing.
Adam Slater, lead economist at the consultancy Oxford Economics, said central banks faced a “formidable challenge” as the pandemic added to company vulnerabilities that were already evident, such as high debt levels and cash shortages.
“The coronavirus is set to sharply cut global growth and also risks sparking substantial levels of financial distress among both businesses and households, potentially cascading into the banking sector,” Slater said.
On Thursday, the Fed promised $1.5tn (£1.2tn) in liquidity support for bond markets, after the outbreak caused disturbances in the crucial market for US government bonds. The European Central Bank (ECB) also took steps to boost lending by eurozone banks, but markets still took fright as it held interest rates steady.
Economists expect the ECB to take further steps in the coming weeks.
Luigi Speranza, chief global economist at BNP Paribas, said: “The lack of an explicit commitment [by the ECB] to do whatever it takes in response to the shock caused by Covid-19 was noticeable.
“We think the ECB is even more likely than before to have to revisit its toolbox in order to re-establish confidence in its determination to deal with the crisis in an effective manner.”