Stocks spike as central banks throw kitchen sink at virus

Stocks spike as central banks throw kitchen sink at virus
The coronavirus outbreak has transformed the US from a place of boundless consumerism to one suddenly constrained by nesting and social distancing. (AFP)
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Updated 20 March 2020

Stocks spike as central banks throw kitchen sink at virus

Stocks spike as central banks throw kitchen sink at virus
  • BoE comes back with second rate cut within days and unleashes its ‘biggest ever ever one-off round of asset purchases’
  • The US Federal Reserve also injected more funds into money markets

PARIS: World stock markets spiked on Thursday as massive central bank action finally got the attention of investors who had earlier shrugged off dizzying amounts of liquidity pouring into the financial system to fight the coronavirus impact.

The Bank of England came back with its second rate cut within days and unleashed its “biggest ever ever one-off round of asset purchases,” said Kallum Pickering, senior economist at Berenberg.

The Bank threw “the kitchen sink” at the coronavirus, said Craig Erlam, senior market analyst at OANDA, a day after the European Central Bank fired its most impressive monetary salvo yet in a bid to prevent a credit crunch in a stuttering eurozone economy.

The US Federal Reserve also injected more funds into money markets on Thursday.

The central bank action, combined with fiscal measures across the globe, helped stock market turn a corner after earlier weakness, with Wall Street more than 1 percent higher in midday trading, and key European equity markets packing even stronger gains.

The ECB’s massive action, meanwhile, undermined the euro against the dollar, which got a shot in the arm from investors buying into safety, even prompting speculation of possible Fed intervention to stem its rise.

The biggest impact of the smorgasbord of monetary efforts was on global bond markets, where yields fell on expectations that central banks will now be gobbling up any long-term debt that governments, and large corporations, are willing to issue.

But voices warning of the limits of monetary policy would not be silenced. “What if liquidity support is not enough?” asked Holger Schmieding, at Berenberg, wondering whether governments might be tempted to take direct stakes in companies, if only to save them from hostile takeover — a policy shift he called “a potential risk.” Thursday’s relief across markets was tempered by the fear of a terrible economic impact still ahead, analysts said.

“Markets are in risk-averse mode,” said Christopher Dembik, head of economic research at Saxo Banque in Paris.

Investors were now expecting a global recession “of a singular size,” he said, adding that solace was nowhere to be found “even if enormous means are being deployed.”

But in the short term, those means did provide some relief to frayed investor nerves.

Investors saw “the European Central Bank calm markets, at least for now, with their stimulus package,” said Scope Markets analyst James Hughes.

The so-called Pandemic Emergency Purchase Program came six days after the ECB unveiled a big-bank stimulus package that failed to calm nervous markets and had piled pressure on the bank to open the cash floodgates.

After announcing the move, ECB boss Christine Lagarde tweeted that “extraordinary times require extraordinary action.” analyst Neil Wilson said the ECB action “looks more like a bazooka than anything they’ve done thus far.”

Earlier Thursday, Asia stocks initially climbed on the ECB’s midnight announcement but soon tumbled as investors contemplated months of economic hardship.

Oil prices rebounded almost as spectacularly as they had dropped on Wednesday when US benchmark WTI lost around a quarter of its value.

Oil markets have been hammered by collapsing demand as the virus prompts sweeping travel restrictions and business closures.