Global markets show cautious recovery on G7 stimulus signals

London — Global stocks and commodity markets extended a tentative recovery from their coronavirus slump on Tuesday, as global policymakers signaled a united front to address the economic fallout from the spreading outbreak.

Europe’s main bourses climbed 2% or more in early trade in London, Frankfurt, Paris and Milan. MSCI’s world stocks index rose 0.5%. Finance ministers from the G7 and central bank governors will hold a conference call on Tuesday (at noon GMT) to discuss measures to deal with the outbreak.

According to a source at the group, a statement it is crafting does not detail any firm fiscal or monetary stimulus plans, however.

“The market really wants a co-ordinated policy response, but the question here is whether a conventional interest-rate response is sufficient, or whether it requires also a fiscal response,” said Sameer Goel at Deutsche Bank. “The problem is — the severity of the problem is not very clear.”

The recovery in risk appetite saw a mild sell-off in safe haven bonds after yields had hit record or long-term lows in recent days as worries about the prospect of a global recession mounted. The decision to hold a call came after the head of the European Central Bank (ECB), Christine Lagarde, on Monday, joined the chorus of central banks signalling a readiness to deal with the threat from the outbreak.

Earlier messages from the US Federal Reserve that it was prepared to act weighed on the dollar.

The improved sentiment helped US S&P 500 futures climb as much as 1% in Asian trade on Tuesday but they trimmed gains to 0.1% following reports on the G7 draft statement lacking firm or immediate commitments.

MSCI’s broadest index of Asia-Pacific shares excluding Japan was 0.8% higher, off earlier highs but still marking the second straight session of rises.

“Barring any further deterioration of the coronavirus outbreak, we believe that the global cyclical recovery is likely to gain further momentum,” Schroders’ Asian multi-asset team said in a report. “This is likely to benefit stocks with higher leverage to global growth, as stronger earnings could support dividend growth.”

Money markets

Japan’s Nikkei lost steam and closed 1.2% lower after short-covering ran its course and as the yen firmed on the dollar, but South Korea’s Kospi rose 0.6%.

Australian shares ended up 0.7% after the central bank cut interest rates to a record low of 0.5%, the fourth reduction in less than a year.

The rout in global stocks last week had already prompted US Fed chair Jerome Powell and Bank of Japan governor Haruhiko Kuroda to flag a readiness to move.

Money markets are fully pricing in a cut of at least 0.25 percentage points to the current 1.50%-1.75% target rate at the US Fed’s March 17-18 meeting as well as a 0.10 percentage point cut to the ECB’s key rate at March 12 meeting.

The frantic moves by policymakers reflected growing fears that the disruption to supply chains, factory output and global travel caused by the new epidemic could deal a serious blow to a world economy trying to recover from the US-China trade war.

Covid-19 now appears to be spreading much more rapidly outside China than within the country, leading the world into uncharted territory, although the World Health Organisation (WHO) has so far stopped short of calling it a pandemic.

US bond yields rolled back some of their sharp falls. The 10-year US treasuries yield moved to 1.1174% from a record low of 1.030% marked on Monday. The rate-sensitive, two-year notes yield jumped back to 0.8452% from Monday’s 3.5-year low of 0.710%.

April Fed funds rate futures still price in about an 80% chance of a 0.50 percentage point cut this month and a total of almost one percentage point cuts by the end of year.

Expectations of US Fed rate cuts prompted investors to cut dollar exposure. Against the yen, the dollar lost 0.5% to ¥107.8, slipping towards a five-month low of 107 set on Monday.

The euro was a shade higher at $1.1146, having hit an eight-week peak of $1.1185 in the previous session. The Australian dollar sat above a recent 11-year trough, largely on short covering after the cut in interest rates.

Oil prices gained another 2% after a jump of more than 4% on Monday. US West Texas Intermediate (WTI) crude futures moved to $47.8 a barrel while Brent crude stood at $52.9. 

Reuters