World stocks tumbled for the fifth straight day on Wednesday with trillions of dollars wiped off world stocks as fears over the speed of spread of the new coronavirus around the world heightened. Since health authorities have warned of a possible coronavirus pandemic, markets have stepped up bets on interest rate cuts.
Demand for defensive plays such as gold remained high as the World Health Organization (WHO) cautioned that the epidemic had peaked in China, but urged other countries to prepare for virus outbreaks. In a change of tone, the U.S. Centers for Disease Control and Prevention also advised Americans to be ready for community spread of the virus.
As of Wednesday, the death toll in Italy had crossed 19, new cases in South Korea rose above 1,260, while Greece and Brazil each reported their first cases of the virus.
The three main indexes have fallen in the past four sessions. The Dow has lost more than 1,900 points in the past two days alone, while the Nasdaq has slid 8.9% from its peak.
The S&P 500, which is down 7.8% from its intraday record high hit last Wednesday, has lost about $1.74 trillion in market capitalization in the last two sessions, according to S&P Dow Jones Indices senior analyst Howard Silverblatt.
However, Wall Street’s main indexes opened higher on Wednesday. The Dow Jones Industrial Average rose 78.10 points, or 0.29%, at the open to 27,159.46.
The S&P 500 opened higher by 11.69 points, or 0.37%, at 3,139.90. The Nasdaq Composite gained 45.94 points, or 0.51%, to 9,011.55 at the opening bell.
Drastic travel restrictions in China, where the coronavirus has claimed almost 3,000 lives, have slammed the brakes on mainland manufacturing and consumer spending, and there are worries other countries will face similar disruptions.
"China's template to contain the virus was to restrict economic activity and that's hitting home," Lombard Odier's chief strategist Salman Ahmed said. "Markets are fearing there will be sequential shutdowns of economic systems to stop the spread."
Those fears of severe economic damage, even a recession, have sent MSCI's All-Country equity index to two-and-a-half-month lows, wiping almost $3 trillion off its value this week alone.
European shares fell to a near four-month low on Wednesday, with losses following a grim session for Asia and Wall Street overnight.
The main European equity benchmark STOXX 600 tumbled over 2.6%, marking its first five-day losing streak since July. Travel stocks, financial services, chemical and technology stocks were among the worst hit, falling between 3% and 4%.
The STOXX 600 was trading 9.4% below the record highs hit just last week, while the past four trading sessions have wiped out about $3 trillion in value from world stocks.
"This is part of an ongoing reassessment of how bad the economic impact could get if the virus were to spread to more countries," said Simona Gambarini, markets economist at Capital Economics in London. "The longer the shutdown lasts, then more likely that some of that production might never come back because companies might go bankrupt and people are also starting to take unpaid leaves."
The latest data from Refinitiv shows European companies are expected to report a 1.2% fall in profits in the fourth quarter, a bigger drop than previously expected, which would keep them stuck in a yearlong earnings recession.
Asian shares excluding Japan fell 1%. Tokyo lost 0.8% on concerns the virus could force the cancellation of the Olympics scheduled for July. This weighed on shares in firms such as Dentsu that are involved in the Games.
A pan-European equity index lost 1%, shrugging off slight gains on futures for the S&P 500, Dow Jones and Nasdaq.
Economic growth worries are reflected in a steep drop in bond yields: 10-year U.S. yields are down 60 basis points since the start of 2020. Moreover, U.S. three-month T-bill yields remained some 18 basis points above 10-year rates – the curve inversion that's considered a classic signal of recession.
Ten- and 30-year U.S. Treasury yields teetered just off record lows and another safe-haven, German bonds, also saw 10-year yields tumble to four-month lows below negative 0.5%.
Analysts note growing market bets on interest rate cuts – expectations that monetary policy will be deployed yet again to head off any downturn.
Money markets are now pricing in roughly two 25-basis-point rate cuts by the U.S. Federal Reserve and expect a 10 bps cut by the European Central Bank by December. A Bank of England rate cut is also fully priced for September.
"Part of this selloff is a cry for help," Ahmed said, adding that Fed cuts were unlikely in the early part of the year unless "we get an Italy-like situation in the United States."
An outbreak of the coronavirus in northern Italy has raised additional fears for its perpetually sluggish economy.
The rate cut expectations weighed on the dollar which is now well off three-year highs reached against the euro on Feb. 20. Against the yen too, it has retreated from recent 10-month highs of 112.23 yen and stood around 110 yen. It traded just off 12-day lows against a basket of currencies.
Some reckon the greenback slump may not last, given the Fed's wariness of rushing into rate cuts. "The significant dovish tilt being priced in by markets from the Fed may not materialize and that might cause the next leg of the dollar rally," said Peter Chatwell, head of multi-asset strategy at Mizuho.
The dash for safety also boosted gold 0.5% to around $1,640 per ounce, heading back toward seven-year highs of 1,688.66 hit on Monday. Oil prices fell, with U.S. futures at the lowest since January 2019, below $50 per barrel.
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