Co-ordinated central-bank stimulus efforts over the weekend failed to soothe rattled markets, as U.S. stocks suffered their worst day since 1987, oil prices plunged, the Canadian dollar weakened and investors sought safety in government bonds.
The remarkable gyrations are occurring amid rising concerns about a severe global economic downturn as authorities worldwide attempt to slow the rate of infection from the new coronavirus pandemic with extraordinary measures that have grounded flights, closed businesses and interrupted supply networks.
“The coronavirus has created unprecedented financial and societal disruption. Equities are a leading indicator because a bear market has occurred without the release of any relevant earnings or macro data,” David Kostin, a strategist at Goldman Sachs, said in a note.
The S&P 500 fell 12 per cent, marking its worst day since the month-long crisis began and bringing its overall decline to nearly 30 per cent since Feb. 19. The Dow Jones Industrial Average shed a record 3,000 points, or nearly 13 per cent.
The selloff accelerated toward the end of the day’s trading session after U.S. President Donald Trump released more restrictive guidelines in response to the outbreak and suggested that the reaction to the pandemic, which is smothering economic activity, could easily last through July.
Canada’s S&P/TSX Composite Index fell 9.9 per cent. Since Feb. 20, the index has fallen a total of 31.2 per cent.
Airline stocks were exceptionally volatile as unprecedented travel restrictions devastate capacity. Centre for Aviation, a consultancy, warned on Sunday that many airlines have probably already breached their debt covenants and most of the world’s airlines will be bankrupt by the end of May.
The Wall Street Journal reported that U.S. airlines are seeking as much as US$50-billion in financial assistance. During a press conference, Mr. Trump said: “We’re going to back the airlines 100 per cent.”
American Airlines fell as much as 20 per cent in early trading before recovering and closing up more than 11 per cent for the day. Air Canada fell 28.1 per cent.
The latest market slump follows a co-ordinated central-bank response, including by the Bank of Canada, to keep financial markets operating normally. The U.S. Federal Reserve slashed its key interest rate by a full percentage point and announced US$700-billion in asset purchases.
“The Fed’s decision to slash interest rates to near-zero won’t stop the economy falling into a recession, but the package of liquidity-boosting measures will help prevent credit markets seizing up, reducing the risks a deeper downturn,” Michael Pearce, an economist at Capital Economics, said in a note.
Nonetheless, financial stocks are reflecting concerns that the global economy is tipping into recession and the risks of a financial crisis are rising as struggling companies look for cash. Bank of America fell 14.5 per cent, to its lowest level since November, 2016. Royal Bank of Canada fell 7.2 per cent, and is now down more than 24 per cent since February.
“Investors are clearly looking for fiscal policy to respond with the same urgency central banks displayed over the weekend,” Josh Nye, an economist at Royal Bank of Canada, said in a note.
Economic data from China, the world’s second largest economy, is suggesting what could be in store for much of the rest of the world, given that China was hit earliest by the outbreak. Over the weekend, China said that its industrial output in February contracted by 13.5 per cent, retail sales in January and February fell 20.5 per cent, year over year, and urban unemployment spiked to a record high of 6.2 per cent.
U.S. preliminary numbers for factory activity in March, seen in the New York Fed’s Empire index, registered its largest monthly decline on record, according to National Bank Financial.
“The ugly data parade, courtesy of the coronavirus pandemic, has started,” Krishen Rangasamy, an economist at National Bank Financial, said in a note.
Commodity prices are reflecting the weaker numbers. West Texas Intermediate crude, the U.S. benchmark for oil, fell 9.7 per cent on Monday to US$28.66 per barrel. The S&P/TSX energy index fell 18 per cent, escalating concerns about bank exposure to the energy sector’s loans even as a key credit-rating agency has argued that the exposure is manageable.
“We presently expect that, even under a severe stress scenario, most Canadian banks would be able to absorb estimated losses within one quarter of earnings,” David Beattie, an analyst at Moody’s Investors Service, said in a note on Friday.
The bond market offered one of the few havens for investors: Prices increased, sending yields down. The yield on the 10-year U.S. Treasury bond fell nearly a quarter of a percentage point, to 0.74 per cent.
However, the yield is well off its lows earlier in the month, despite the Fed’s extraordinary rate cuts and stimulus efforts, and trading activity has been volatile. Some observers warn that key investors, such as global banks, may be retreating from the market.
“This is supposed to be the deepest market in the world, and liquidity has just disappeared,” Dickie Hodges, a bond fund manager at Nomura Asset Management, told the Financial Times.