Stocks plunged into a full-on bear-market rout and the U.S. credit market showed stresses of its own as financial players grapple with the fallout from a global economy reeling over the impact of the coronavirus pandemic.
Canada’s main stock index plummeted 12.3 per cent, its biggest one-day drop since 1940, while U.S. stocks sank 9.5 per cent, both extending major declines in recent sessions amid growing fear about the spreading virus.
The situation is so severe that the U.S. Federal Reserve on Thursday afternoon said it will pump US$1.5-trillion into the financial system through the purchase of a range of U.S. government debt, recalling extraordinary measures taken during the 2008 financial crisis in a bid to add liquidity for banks.
"These changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak,” the New York Fed said in a statement.
The Bank of Canada also took steps to ensure stability in Canada’s financial system and to support interbank lending. The central bank said it’s expanding a program of purchasing bonds, starting with a $500-million operation on Monday, followed by other moves on Tuesday totalling $7-billion.
“The Bank of Canada continues to closely monitor global market developments and remains committed to providing liquidity as required to support the functioning of the Canadian financial system,” it said in a statement after the close of markets on Thursday.
The Fed move, however, failed to soothe rattled nerves. The S&P 500 rebounded only briefly after the announcement, then ended the day down 260.74 points – its worst one-day slide since 1987 and deepening a rout that began three weeks ago.
The index has fallen a total of 26.7 per cent since Feb. 19, for its quickest descent into bear market territory in at least 75 years as markets reflect concerns that companies could run out of cash before the pandemic ends. Canada’s stock index has fallen about 30 per cent from its recent high on Feb. 20.
“If credit flows are disrupted or shut down, then within a few days the real economy is going to start seizing up. You’ll see layoffs, businesses really cut back on investment. It’ll be very difficult on the real economy,” Mark Zandi, chief economist at Moody’s Analytics, said in an interview.
The tremendous market volatility is happening while yields on high-rated corporate bonds are rising, suggesting that investors are recoiling from risk as corporate profit expectations implode and some blue-chip companies seek infusions of cash.
Reuters reported on Wednesday that Boeing Co. will draw down the full amount on a US$13.8-billion loan. The aerospace company, already struggling with the grounding of its 737 MAX jets, has seen its share price fall 51 per cent since Feb. 12.
More troubling, ultra-safe U.S. government bonds, usually go-to havens when stocks are freefalling, took a turn for the worse this week amid concerns that trading activity is drying up – a lack of liquidity that the Fed is now trying to address.
During Wednesday’s market mayhem, the yield on the 30-year U.S. Treasury bond increased by 0.11 percentage points as bond prices fell, an unusual move given that bonds should have been in high demand when the S&P 500 cratered 5 per cent by the end of the day.
Such moves have some observers worried.
“The U.S. Treasury market is the bedrock for all other financial markets; it is the world’s risk free rate and allows the U.S. government to fund itself. If the U.S. Treasury market experiences large-scale illiquidity it will be difficult for other markets to price effectively and could lead to large scale position liquidations elsewhere,” Mark Cabana, a strategist at Bank of America, said in a note released on Thursday morning.
The problem is appearing well beyond U.S. markets. Chris Cockeram, associate portfolio manager at Ninepoint Partners in Toronto, said that he sold German government long-dated debt, known as bunds, on Thursday morning. The transaction, which would normally take about 10 seconds took 15 minutes, reflecting the turbulence in credit markets.
Among corporate bonds, yields are widening relative to safe government debt, creating spreads that are particularly wide in the case of debt issued by energy companies that are struggling with low oil prices. Even some high quality bonds aren’t trading hands in an open market but by appointment – where a specific buyer and seller must arrange a deal.
“It’s getting pretty messy,” Mr. Cockeram said in an interview. “To be trading by appointment on bank bonds and higher quality names is not normal, for sure.”
Authorities worldwide are trying to stanch the spread of the coronavirus. Central banks in the United States, Canada and the U.K. have cut their key interest rates in an attempt to stimulate economic activity. Italy has essentially locked down its entire population and closed most stores. And the United States is imposing a 30-day travel ban on flights from mainland Europe.
The National Basketball Association has suspended the rest of its season, the National Hockey League suspended operations and Major League Baseball has delayed its opening day.
With a report from Matt Lundy
David Berman