Stocks surged on Monday in anticipation that central banks will cut their key interest rates to give the ailing global economy a boost, ending a vicious losing streak last week when major U.S. and Canadian benchmarks sustained their worst losses since the financial crisis in 2008.
The S&P 500 rose 136.01 points or 4.6 per cent and the Dow Jones Industrial Average leapt 1,293.96 points or 5.1 per cent for its biggest point gain on record. Canada’s S&P/TSX Composite Index increased 290.21 points or 1.8 per cent.
But the session began with some see-sawing amid weak economic news and plummeting bond yields as the coronavirus (COVID-19) continued to spread globally, dampening the economic outlook.
The yield on the 10-year U.S. Treasury bond, which moves inversely to bond prices, fell as low as 1.031 per cent early in the session, touching a fresh record low – and down from more than 1.9 per cent at the start of the year.
The Government of Canada 10-year bond fell as low as 1.027 per cent, down from about 1.7 per cent at the start of the year. Short-term bonds also fell.
"People are reading through that and saying: The central banks have our backs. The virus will probably spread and impact economies, but central banks are ready to cut interest rates as needed,” Jordan Steiner, a portfolio manager at Montreal-based Lester Asset Management, said in an interview.
Financial markets are now pricing in rate cuts by the Bank of Canada, starting as soon as this week, and two cuts by the U.S. Federal Reserve, starting later this month, as the global spread of the coronavirus weighs on travel, supply networks and trade. Reports on Monday suggested that Group of Seven finance ministers and central bankers will discuss their response to COVID-19 on Tuesday, raising the possibility of a co-ordinated response.
Indeed, the backdrop to the sudden rush into stocks was hardly upbeat.
The Organization for Economic Co-operation and Development slashed its full-year economic growth forecast for 2020 to 2.4 per cent, down half a percentage point from its previous forecast in November. It warned that growth could fall as low as 1.5 per cent if COVID-19 isn’t contained.
In the United States, the Institute for Supply Management manufacturing index deteriorated in February, suggesting a disruption to supply chains as a result of the outbreak, which began in China.
“But with the virus continuing to spread around the world and a more serious outbreak within the U.S. now looking increasingly likely, the disruption is likely to worsen over the coming weeks,” Andrew Hunter, senior U.S. economist at Capital Economics, said in a note.
On Sunday, China reported that its purchasing managers’ indexes for manufacturing and non-manufacturing activity contracted sharply in February to record lows, buttressing economists’ expectations that China’s economy will contract in the first quarter for the first time in modern history.
“But, we hope this will mark the trough. The rapid decline in reported new virus cases is already prompting Chinese authorities to attempt to normalize operations by the end of this quarter,” Beata Caranci, chief economist at Toronto-Dominion Bank, said in a note.
A trough can look ugly though. Goldman Sachs strategist David Kostin said in a note that investors should expect to see a wave of lowered corporate guidance over the next four weeks, culminating in declining profits in the first half of 2020.
But he assumes that economic activity will rebound in the second half of the year, driving the S&P 500 to his target of 3,400 by the end of the year, if the U.S. avoids slipping into recession.
This worst-is-over outlook may be driving investors to scoop up stocks that were pummelled last week.
Mr. Steiner noted that last week’s dramatic sell-off was indiscriminate. Sectors such as utilities, telecommunications and real estate fell with everything else, even though stocks with attractive dividends should perform relatively well when bond yields are falling.
On Monday, investors appeared to be more selective, favouring many defensive dividend stocks over a number of insurance companies and banks, which can struggle when interest rates are declining.
In Canada, the big banks rose an average of just 1 per cent while Great-West Lifeco Inc. fell 1.7 per cent, lagging the broader market. But Fortis Inc. rose 3.8 per cent and BCE Inc. rose 5.1 per cent.