Virus-hit global financial markets in turmoil; recession odds grow

New York

VOLATILITY continued to roil global financial markets as investors struggle to adjust to an unprecedented upheaval in social interactions that looks set to plunge the world into recession.

US stocks sought to bounce back from Wall Street's worst day since 1987, Treasuries slipped and stresses appeared in the short-term funding and front-edit credit markets.

The S&P 500 rose 1.1 per cent after a choppy overnight session, but the Dow Jones Industrial Average erased gains and headed toward 20,000. It's up 2.8 per cent since President Donald Trump's inauguration.

Treasuries declined, reversing part of a nearly 25 basis-point surge on Monday. The three-month dollar Libor rate jumped the most since 2008, and similar maturity cross currency basis swaps for euro-dollar, a proxy for how expensive it is to get the greenback, traded at the widest since 2011.

"What a crazy day, people just don't know what to do," said Matt Maley, equity strategist at Miller and Tabak and Co. "There's confusion. People don't have a good idea about the future fundamentals. Right now because of the coronavirus we have no idea."

With the coronavirus grinding the global economy toward a standstill and central banks central banks dramatically stepping up efforts to stabilise capital markets and liquidity, traders are now clamouring for fiscal stimulus, particularly in the US. The New York Federal Reserve, for the second straight day, announced it was injecting an additional US$500 billion virtually interest-free into financial markets on Tuesday to ease the coronavirus pandemic's financial strain.

The Trump administration asked Congress for US$850 billion to combat the virus's effects, a third attempt to juice government spending.

Data showed US retail sales fell in February, indicating the main driver of the economy, consumer spending, had begun to slow even before outbreak containment measures began. Companies began to scramble for cash, with Kraft Heinz, Caesars and MGM drawing down credit lines.

"A bear market does not preclude rallies," said Eleanor Creagh, market strategist at Saxo Capital Markets. "The biggest rallies can be in bear markets - erratic swings are exacerbated by the present high-volatility regime and strained liquidity conditions. With VIX remaining significantly above the long-term equilibrium, alarm bells are still sounding and traders should be wary of relief rallies." The VIX index is a measure of expected price fluctuations in the S&P 500 Index options over the next 30 days.

World share markets and oil prices struggled to shake off their coronavirus fears on Tuesday after Wall Street's worst rout since the Black Monday crash of 1987. After Monday's meltdown, it was another day to test the nerves. Asia's traders saw the Philippines become the first country to close its markets.

Europe watched an early rebound get wiped out as the region's battered airline and travel stocks suffered another 7 per cent drubbing. Data showed German investor morale at lows last seen in the 2008 financial crisis, and rating agency S&P Global warned the inevitable global recession this year would lead to a spike in defaults.

France, Italy, Spain and Belgium curbed stock market trading on Tuesday, banning short-selling to shield some of Europe's biggest companies from a sell-off triggered by the coronavirus.

The move will temporarily halt bets on falling shares at scores of companies, from the world's largest brewer Anheuser-Busch InBev to Spanish bank Santander and Air France-KLM.

The radical curbs, and calls by some Italian politicians for stock markets to be shut, were in contrast to the US and Britain, where regulators said they should stay open and no curbs are imposed.

They also differed from Germany and highlighted the splintered approach of the European Union and its haphazard response to the health pandemic and economic fallout. BLOOMBERG, REUTERS, AFP