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Market Outlook latest: Global markets face breaking point

Trump's intervention in coronavirus crisis fuels further selling
March 12, 2020

17:30 Global markets face breaking point

Markets are at breaking point, there is a real systemic risk now with financial markets in complete turmoil over the coronavirus, Treasury markets showing immense signs of stress and a scramble for dollars whacking FX markets all over the place. Today has been utterly brutal. European shares had their worst day ever and it is not unduly pessimistic to suggest that panic has taken hold.

The FTSE 100 closed down by 10.87 per cent suffering its second worst selloff in history and its worst day since 1987. The Euro Stoxx 600 slumped 11 per cent for its worst day on record. US markets were also in deep turmoil before the Fed tried to steady the ship with a $1 trillion repo package that lifted shares off the lows, however much of the spike was quickly handed back. Again it looks like the Fed is not doing enough. 

The market is aggressively pricing for a major global recession. There is total uncertainty and no one in the market has ever dealt with this kind of thing. No one knows what a total economic shutdown, however temporary, looks like. Shares are simply reflecting deep anxiety about the global economy. 

We will see an overshoot to the downside – this is pure panic selling taking hold – which will make the rally all the more swift when it comes. As we’ve previously noted, the interest rate risk now is huge – if yields power back it will be carnage – a taster of which we have seen today with US 10-year yields pushing up hard on 0.85 per cent. There is real trouble in the bond market.

 

Lagarde fluffs her lines

The ECB fell well short. Christine Lagarde literally fluffed her lines – saying that the ECB is not here to close bond spreads and the bank would cut rates if necessary. This was so far from the Draghi ‘whatever it takes’ mantra it effectively removed a huge amount of the ECB put from markets in a matter of minutes. We saw the EUR tumble, spreads widen and equities fall further. If she is trying to put the onus on European governments to do the heavy lifting, it’s a bold strategy, and may be the right one. The only trouble you are face the risk of fuelling this vicious cycle of selling. There were measures in the ECB package today to support, but seemed to be undone by Lagarde’s rather loose comments. It had echoes of Mervyn King and the moral hazard argument of 2007.

 

US shares tumbled on the open and triggered the 7 per cent down circuit breaker for the second time this week. To halt trading once could be called a misfortune, to do it twice in the same week is just carelessness. The Vix surged to its highest since the financial crisis. The Fed’s efforts were a help but we are yet to see a meaningful bounce of any note.

Gold prices sank too as the market moved to sell whatever it could. Literally cash is the only thing investors want. Cryptos also sank for the same reason. We are witnessing total liquidation of investor positions. 

In FX, the dollar enjoyed (endured) a phenomenal rally as investors rushed for dollars amid a liquidity squeeze. Sterling fell 2.5 per cent, with GBPUSD taking a 1.24 handle and the euro dipped 1.8 per cent to take a 1.10 handle again. The Fed moves helped to ease the pressure as the dollar retreated from its highs later on.

 

10:15 Stocks tumble, US futures limit down, BoJ eyes more stimulus

The bears are out in full force and it’s another hideous day for equity markets as selling continues to beget more selling. It’s pretty frenzied out there today. Cash is king right now.

US futures have hit limit down, which has halted some of the bloodbath but in Europe’s it’s another very hard selloff. E-minis moved towards 2,600 where they were halted before rallying on some stimulus chatter out of Japan. The Dow is shaping up to open more than 1,000 points lower. This is genuine panic selling off the back of Trump’s travel ban. It seems whatever the US authorities do, be it a rate cut or travel restrictions, it only makes things worse.

In Europe, the DAX fell more than 6.5 per cent to test lows under 9670. The FTSE 100 was down almost 6 per cent, but came off its lows at 5480 to hold around 5570. Everything is in the red, everything stock is being sold off in a broad sweep of risk-off pressure. Yet more billions wiped off stock valuations, yet larger pension deficits, cash flow squeezes and dividends surely coming under pressure. There are very few days when every stock is down like this.

The Bank of Japan has indicated it will ramp up stimulus and will show a more active stance on buying assets. It looks like the BoJ is going to throw everything it has left at this. That news saw equities bounce higher and took the USDJPY higher too as the yen sold off on bets the BoJ is going to take down the currency. I repeat that we could see the Fed out today.

The FTSE is a bloodbath – biggest fallers here as of send time

 

08:15 Travel ban rocks global markets, airlines smashed

When Prince Albert died of typhoid in 1861 at the age of 42, it shook the elite of Victorian Britain to their bones. Even a royal could succumb to a disease that killed thousands of poor people each year. Americans will be concerned to learn that Tom Hanks and his wife have been diagnosed with coronavirus. In the UK, a member of the Cabinet has self-isolated after coming into contact with Nadine Dorries, the public health minister who has the virus.  

The World Health Organisation has finally declared the outbreak a pandemic – this is only going to force governments to feel they need to take more draconian measures, ramping up the uncertainty and the near-term economic shock. Volatility is not going anywhere, and we again see global stock markets tumbling on Thursday. 

So much for Trump’s stimulus. Instead of his late-night presidential address calming things, it only fanned the flames raging in markets. The president has gone from calling it a Democrat hoax to banning all travel from Europe in just 12 days. 

A 30-day European travel ban didn’t allay market fears that this virus is spreading very fast and will wreak economic havoc. Indeed, it actually makes the economic harm greater, at least in the short term. The WHO, which finally labelled the Covid-19 outbreak a pandemic, advises against travel bans. Meanwhile the lockdown in Italy tightens – all but essential services are now shut. The rest of Europe may be swifter to act – no one wants to be the next Italy. Chicago-based exchange CME Group says it will shut its trading floor at the end of the week. 

The Dow sank almost 1500 points to close in a bear market. The S&P 500 5 per cent lower at 2741, just above key support at 2734. 

Futures plunged further after Mr Trump’s address, taking SPX below 2640 as of send time. The next Fibonacci support rests around 2550. 

There is a good chance today US equity markets trigger another circuit breaker and there is a possibility the Fed also steps in again.  

Asian shares plunged overnight. European shares are rocking again on Thursday and opened about 5 per cent lower with the FTSE 100 testing the 5500 level. The DAX is flirting with 9800, well below the Dec 2018 lows. 

 

ECB meeting 

This will be the moment for Christine Lagarde to deliver a ‘whatever it takes’ moment. The problem is the ECB has very limited scope to act, with rates already deeply in negative territory. It has little ammo left and faces a double supply and demand shock that normal economic policies cannot really do much about.  

There is a high probability the ECB will cut rates to -0.6 per cent and add €20bn to QE. On its own it won’t amount to much, but it has to be seen to be acting. The ECB is also likely to launch a new LTRO for SMEs, cut the TLTRO rate and raise the tiering multiplier to reduce the impact on banks of negative rates.  

 

Equities 

The US ban on European travel is simply hideous for the flag carrier airlines. A knock to the Transatlantic business was the big fear and is going to add to fears that this outbreak will lead to lasting damage. The 30-day ban could be extended - once in place you need to be sure it’s safe to lift before you do so. Whilst it may or may not be the sensible decision, it’s economically very damaging and is another nail in the airlines’ coffin. Chinese airlines took a $3bn hit from the loss of capacity in February, an indication of what’s in store for European carriers. 

Shares in airlines opened significantly lower after the announcement of the travel ban. IAG plunged 9 per cent, with Ryanair down 7 per cent in the first minutes of trading.  

WH Smith: You have to feel a little sorry for a company that has done a brilliant job of pivoting away from the struggling British high street to driving all its revenue and profit growth from airports and train stations. A rapid decline in footfall at travel sites because of the coronavirus is hitting revenues and will result in a material decline in profits this year. Trump’s 30-day European travel ban only makes things worse. 

Management estimate the loss of footfall due to the virus will result in a hit of between £100m and £130m on the group's revenue and between £30m and £40m on underlying group profit before tax. WH Smith has seen a significant impact on its Asia-Pacific business since February. This only accounts for 5 per cent of revenues from its Travel division but over the last two weeks the company has started to see a material reduction in passenger numbers at airports at the UK, US and Europe. 

For UK Travel, management expect revenue in the second half to be down approximately 15 per cent on expectations. Airport revenues are seen down 35 per cent in March and April.  On the same basis, including significant reductions in March and April, second half revenue in the US is expected to be approximately 20 per cent lower than prior expectations.  The rest of the International business is also expected to be approximately 20 per cent lower. First half revenues and profits look solid enough but no one is trading the shares on that. 

Looking at the Budget, whilst a positive and decisive dose of economic stimulus is exactly what’s required, this was one for SMEs. Picking through it we didn’t see much support for larger listed companies. No business rate relief for the likes of Tesco, no great home building splurge yet. 

Ex-dividend factors clip 4 points from the FTSE 100 and 13.5 from the FTSE 250 today

Adept Tech

5.10p

Anglo American

$0.47c

Apax Global

4.68p

Assura

0.697p

CRH

0.63c

Colefax

2.60p

GVC

0.176p

Gore Street Energy

2.00p

Hansard Global

1.80p

Jupiter

9.20p

Land Sec's

11.60p

Law Debenture

19.40p

London Finance

0.55p

LondonMetric

2.00p

RM Plc

6.00p

Ricardo

6.24p

Spirent Comms

2.70p

Trifast

1.20p

 

Neil Wilson is chief markets analyst at Markets.com