Via Financial Times

Stock rallies in Europe and Asia petered out on Wednesday, as investors digested warnings over the health of the global economy and looked for further signs of trouble in corporate earnings. 

European stocks slipped following a downbeat session in Asia. London’s FTSE 100 fell 2.3 per cent, while the CAC 40 in Paris was 1.8 per cent lower and Frankfurt’s Dax was down 2.1 per cent. 

The renewed sense of caution left Europe’s Stoxx 600 benchmark on course to end a five-session winning streak, while futures tied to Wall Street’s S&P 500 index were down 1.7 per cent.

European and US stock markets are trading more than 20 per cent above mid-March lows on optimism that the spread of Covid-19 infections could be peaking. But this quarter’s corporate earnings season looks set to test the durability of the rebound, as results shed new light on the impact of the wide-ranging lockdowns that have stifled economies around the world.

Goldman Sachs and Bank of America on Wednesday both saw first-quarter earnings slip around 45 per cent and they braced for more pain among clients by setting aside billions of dollars to cover loan losses.

Wall Street analysts forecast an 8 per cent decline in S&P 500 profits this year, which would mark the biggest fall since 2009 during the financial crisis.

Column chart of Growth in earnings per share for companies in the S&P 500 (%)* showing Investors brace for biggest drop in profits since the financial crisis

Strategists at Barclays said “dire” results in Europe should not be a shock to markets, but could offer a “reality check” following the recent swing higher. 

“Sharp downgrades lie ahead and unusually vague guidance due to the fluid situation won’t improve visibility,” the bank’s European equity strategists wrote in a note to clients on Wednesday. “Yet with central banks ‘all in’, unprecedented government bailouts and signs of a slowing outbreak, a second-half recovery seems more likely than not.”

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A sharp fall in the price of oil also weighed on shares, after global demand for crude was forecast to plunge even if lockdowns and travel bans were lifted. 

Oil major including Total, BP and Shell each fell around 5 per cent, while Brent crude was down 4 per cent to $28.40 per barrel.

Line chart of Dollars per barrel showing Brent crude in 2020

Asia-Pacific stocks fell following further indications the pandemic was set to hit the global economy hard, with the IMF warning of the biggest worldwide slowdown since the 1930s.

“The publication of the IMF’s Spring forecast has rather put the dampeners on the brightening market mood,” said Société Générale strategist Kit Juckes.

Sentiment was also dented by President Donald Trump’s announcement that the US would suspend funding to the World Health Organization, accusing it of “severely mismanaging” its response to the crisis.

In China, a brief boost to investor sentiment — spurred by its central bank’s decision on Wednesday to cut a key lending rate to bolster the economy — quickly faded. 

The CSI 300 of Shanghai and Shenzhen-listed stocks fell 0.7 per cent after the People’s Bank of China cut its one-year medium-term lending facility by 0.2 percentage points to 2.95 per cent, the lowest level since its introduction in 2014. The central bank also injected Rmb100bn ($14.2bn) through the facility. 

Michelle Lam, Greater China economist at Société Générale, noted that significant monetary support from the US Federal Reserve had given Beijing more breathing room to loosen its own policy. 

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But analysts at Nomura said markets “might still be too optimistic about the recovery in China”, as the country faces the dual challenge of falling external demand and the possibility of a second wave of coronavirus cases that could once again disrupt the economy. 

Japan’s benchmark Topix index closed flat, while Australia’s S&P/ASX 200 fell 0.4 per cent and Hong Kong’s Hang Seng shed 1.2 per cent.

The 10-year US Treasury yield, which falls as bond prices rise, was down 0.07 percentage points at 0.68 per cent as investors sought safer assets.