By Tommy Wilkes
LONDON (Reuters) – The rebound in stocks ran out of steam on Wednesday despite the Bank of England joining other central banks in cutting interest rates, as investors weighed up whether coordinated monetary and fiscal stimulus could counter the shock from coronavirus.
The surprise move from the BoE, which — on the day that Britain’s budget opened the taps on spending — also announced measures to support bank lending, initially lifted shares after a lacklustre session in Asia.
Wall Street had rallied sharply on Tuesday, helping reverse some of Monday’s brutal losses, but that did not translate into improved sentiment on Wednesday as scepticism grew about the stimulus package announced by Washington to fight the epidemic.
By 1100 GMT, European stock gains had fizzled as caution set in. The FTSE 100 <.FTSE> fell 0.4% after earlier being up more than 1%, the Euro Stoxx <.STOXXE> was 0.09% lower and Germany’s DAX <.GDAX> down 0.06%.
U.S. stock futures <ESc1> dropped 3.32%.
As of Tuesday’s close, $8.1 trillion in value has been erased from global stock markets in the recent rout.
The MSCI all-country index <.MIWD00000PUS> has lost more than 15% of its value since it peaked on Feb. 12, and was 0.38% lower on Wednesday.
With the Federal Reserve having already cut rates this month, the pressure is now on the European Central Bank to act when it meets on Thursday.
“It is the only thing central banks can do in a public health crisis,” said Neil Dwane, global strategist and portfolio manager at Allianz Global Investors. “They are trying to take the shackles off the banks to ensure we don’t get a cash crunch.”
The BoE, which cut rates by 50 basis points to 0.25%, did not announce new quantitative easing measures but it did launch a new scheme to support lending to small businesses. The UK finance minister began presenting his first annual budget shortly after 1230 GMT.
Italy, which is on lockdown in an attempt to slow new infections, earmarked $28.3 billion to soften the economic impact.
After a decade of extraordinary monetary policy, investors say the impact of easier policy has clear limits and increased government spending must bear the brunt of the policy response to the economic consequences of the outbreak.
“For the ECB their problem is that there is even more pressure because they face the third-largest euro zone economy — Italy — in dire straits,” Dwane said.
A key gauge of long-term euro zone inflation expectations dropped to another record low on Wednesday, in what analysts said suggested investors were positioning for deflation risks.
Graphic: World FX rates in 2020 http://fingfx.thomsonreuters.com/gfx/rngs/GLOBAL-CURRENCIES-PERFORMANCE/0100301V041/index.html
Sterling initially fell sharply following the BoE decision before rebounding. It was last up 0.5% at $1.2938 <GBP=D3> but down 0.3% versus the euro at 87.67 pence <EURGBP=D3>.
The dollar resumed its decline against the yen <JPY=EBS>, the Swiss franc <CHF=EBS> and the euro <EUR=EBS>, weighed down by uncertainty about the U.S government’s response and the drop in U.S. Treasury yields. The greenback remained significantly above levels seen on Monday, however.
Benchmark U.S. 10-year Treasury yields <US10T=RR> fell 7 basis points to 0.684%, still more than double Monday’s record low yield of 0.3180%.
Market participants largely expect the Fed to cut rates for the second time this month at next week’s scheduled policy meeting, after it surprised investors with a 50-basis-point cut last week. [FEDWATCH]
German government bond yields rose <DE10YT=RR> after the BoE cut supported sentiment, while Italian yields <IT10YT=RR> — which had shot up on worries the country with Europe’s worst outbreak of the virus is sliding into a recession — tumbled as much as 20 basis points as bets on ECB stimulus grow.
Karen Ward, Chief Market Strategist for EMEA at JP Morgan Asset Management, said all eyes were now on British finance minister Rishi Sunak, who announced a big rise in spending to help businesses and households through the coronavirus epidemic.
“Investors may be comforted by the fact that policymakers are willing to deploy their full ammunition — moving a step closer to helicopter money,” she said.
A radical argument for fiscal policy to create money and hand it out to the public is sometimes referred to as “helicopter money”.
U.S. crude <CLc1> slid 3.67% to $33.09 per barrel, while Brent crude <LCOc1> dropped 3.9% to $35.77 after Saudi Aramco announced plans to raise its production capacity at the same time as the coronavirus was set to weaken demand.
On Monday, oil prices plunged after the collapse of coordinated output cuts by Saudi Arabia, Russia and others.
Spot gold <XAU=> rose 1% to $1,665 per ounce as investors sought safety in the precious metal. [GOL/]
Graphic: Markets hit hard by coronavirus worries https://fingfx.thomsonreuters.com/gfx/mkt/13/2716/2681/Pasted%20Image.jpg
(Additional reporting by Marc Jones in London; Editing by Catherine Evans)