European stock markets looked to recover some ground early on Tuesday on hopes of a round of stimulus measures as the market tried to rally the troops after the rout of Black Monday. Investors are licking wounds and there is a stabilisation of the rout, but this looks like a short-term bounce on oversold levels, not a meaningful turn. It smells like a dead cat. The stimulus is coming, but the situation on the ground gets worse. It seems comments from Donald Trump, and overnight some emollient tones from the Japanese authorities, are helping.
Capitulation
Yesterday was a total capitulation. The S&P 500 declined 7.6 per cent, its worst decline since the financial crisis and making it perilously close to entering a bear market at -18.9 per cent from its 19 February high. The FTSE 100 notched its fifth biggest decline on record. Across Europe the major indices are now in bear market territory. Of the only 9 winners on the S&P 500 yesterday were car parts firms, cleaning products manufacturers and retailers. Energy stocks dropped by a fifth, while financials fell by more than tenth.
Today has seen some tentative recovery. London, Frankfurt and Paris advanced 1 per cent on the open.
Aside from stimulus expectations, there’s a definite sense that capitulation like Monday is by its very nature overdone, that it’s the clear out moment and things can only get better. It’s also true that the shock of the oil price drop probably exerted undue influence on investor sentiment given weaker oil prices should help boost global growth.
However, the news on coronavirus is not improving and the trajectory across European nations is all too similar to Italy. That country has placed everyone on lockdown, extending the quarantine to every citizen; being Italy though it’s still voluntary.
Moreover, in these moments we usually see clusters of large percentage drops for indices, so any sense we are through the worst of it should be tempered by history as well.
What’s required is for bond yields to rise. US 10yr Treasury yields have picked up noticeably off the lows at 0.32 per cent yesterday to around 0.7 per cent overnight. This should offer some comfort to weary investors. Gold has retreated in lock step from 7-year highs above $1700 back to $1650, where it found support and eased back to $1660.
Stimulus-a-coming
The White House is proposing a major relief package to combat the economic damage of the coronavirus outbreak, including possible tax cuts. Australia says this could be worse than 2008 and is preparing a multi-billion dollar stimulus package. The Bank of Japan said overnight it will work with the government to do whatever is needed.
Even the EU is looking at loosening state aid rules to help struggling businesses. Europe has to work out a fiscal response - it simply cannot rely on the ECB this time. Italy says it will boost its stimulus package to €10bn from €7.5bn.
In the coming days we have the U.K. Budget and ECB meeting. Markets will likely pay more attention to what the fiscal response is to whether central banks cut rates, but nonetheless there is pressure on the ECB to announce more than a symbolic interest rate cut of 10bps.
Elsewhere, events and exhibitions operator Informa says it will take a £425m hit from the outbreak of the virus. DFS Furniture also warned of a hit to footfall as shoppers stay home. Air France KLM said it will cancel 3,600 flights in March. There is going to be lasting damage done to the airline sector – consolidation in European short haul will accelerate.
Oil is off its lows, with WTI firming up to $33, marking a rise of more than 7 per cent having suffered a 30 per cent drop. But the rally came into resistance around the 50 per cent retracement of the gap lower at $34.80.
In FX, better risk appetite helped to drive the yen off its highs. USDJPY rallied through to a high at 105 around 05:30 this morning as it sought to close the gap with Friday’s lows, where it encountered resistance and we have since seen a retreat to 104 and even a 103 handle being taken briefly again.
Neil Wilson is chief markets analyst at Markets.com
