Stimulus from Ottawa fails to calm investors as energy sector weighs on TSX

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Stocks fell sharply, while bonds and gold failed to offer any support, in a widespread rout amid ongoing uncertainty over the economic downturn tied to the coronavirus pandemic, leaving cash as the sole asset in high demand.

The latest swing on Wednesday followed rising cases of COVID-19 globally and increasingly dire warnings that the world’s economy stands at the precipice of an unprecedented downturn, despite support from governments and central banks.

The Canadian government announced on Wednesday an $82-billion rescue package for businesses and households. The U.S. government is putting together a US$1-trillion package.

But the drastic moves failed to calm the stock market, which has been rattled by tremendous uncertainty over the long-term consequences of shuttered stores, locked-down consumers and severed networks.

The S&P 500 fell 5.2 per cent, briefly touching its lowest level in nearly three years before recovering some ground toward the end of trading. The index has fallen a total of 29 per cent in just four weeks.

Among the carnage, Boeing Co. fell 18.6 per cent and American Airlines Group fell 25.4 per cent.

The volatility is without precedent. The S&P 500 has moved at least 4 per cent, up and down, for eight straight sessions, a record.

“To be clear, we continue to believe there unfortunately does not exist a magic chart, table or bullet point that will answer all questions, let alone illustrate the bottom or foretell the recovery in stocks that WILL follow this,” Brian Belski, a strategist at BMO Nesbitt Burns, said in a note.

Canada’s S&P/TSX Composite Index fell 7.6 per cent, hitting its lowest level since 2012.

The energy sector continues to exert a punishing drag on the commodity-heavy index as the crude oil prices plummet.

The price of U.S. crude oil fell about 20 per cent, hitting 18-year lows. The price of Canadian heavy oil, which underpins much of the Canadian oil sands, plunged more than 24 per cent, falling below US$10 a barrel for the first time.

Suncor Energy Inc., widely viewed as a diversified and well-capitalized energy giant, fell 15.8 per cent.

“At this point, it is difficult to see the market establishing a short-term bottom in the middle of two major crises,” Justin Bouchard, an analyst at Desjardins Securities, said in a note, referring to the COVID-19 outbreak and Saudi Arabia’s recent decision to raise its oil production.

The remarkable moves are not confined to commodities and the stock market.

Government bonds, whose yields usually drop when stocks are falling, did the opposite on Wednesday: Yields rose, suggesting that bonds are no longer functioning as market havens as banks, companies and investors seek cash, raising some alarms.

“Of the many stunning charts of today’s market moves, [rising Treasury yields] is the most concerning for the health of markets and the economy,” Mohamed El-Erian, chief economic adviser to Allianz, tweeted on Wednesday afternoon.

The yield on the 10-year U.S. Treasury bond, which moves in the opposite direction to price, increased 8.3 basis points to 1.165 per cent in afternoon trading, as bond prices fell (there are 100 basis points in a percentage point). The yield had fallen as low as 0.38 per cent on March 9.

Canadian government bond yields also increased on Wednesday. The yield on the Government of Canada 10-year bond jumped to 1.035 per cent, up nearly 8 basis points and up from a low of just 0.233 per cent on March 9. British bond yields also increased.

“Today’s further big increases in the yields of U.S. Treasuries and U.K. Gilts appear to reflect continued fire selling of ‘safe’ assets to cover losses on ‘riskier’ ones,” John Higgins, an economist at Capital Economics, said in a note.

The iShares Core U.S. Aggregate Bond ETF, an exchange traded fund that provides broad exposure to U.S. investment grade bonds, fell 2 per cent on Wednesday and has slumped 8.5 per cent since March 9.

Gold, another popular haven, also failed to offer support: The price fell 2.4 per cent to US$1,488 per ounce.

The U.S. dollar was strong though, reinforcing the demand for safe cash. The greenback’s gains sent the Canadian dollar at one point plummeting more than two cents, to nearly US68 cents, its lowest level since 2003.

Given the unprecedented nature of the selloff and the uncertainty of the economic damage, many observers are putting less faith in stock valuations and profit projections. Instead, they believe that the only way out of the bear market rout is through tackling the spread of COVID-19.

Ed Yardeni, president of Yardeni Research, compared the downturn to previous ones since 1987, looking at the depth of the declines, the causes and the responses from central banks and governments – but he recognized that the differences may be more pronounced than the similarities.

“The big difference between now and then is the virus pandemic. If it passes in a few months, as we expect, then the bear market should be over soon. If it gets much worse and lasts past the summer, the bear market would be more like that of 2007-09,” Mr. Yardeni said in a note.

Similarly, Mr. Belski expects that since COVID-19 news is what’s driving stocks down, it will also be what underpins any recovery.

“Regrettably, a less negative and hopefully positive stream of headlines on coronavirus (COVID-19 virus) is most likely the only acceptable antidote the stock market is yearning for right now,” Mr. Belski said.

That’s not happening yet, as the number of confirmed cases of COVID-19 continues to soar in some parts of the world, including the United States.