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US central bank gives markets $1.5tn injection Federal Reserve injects $1.5tn to markets as virus panic spreads
(about 2 hours later)
Moves aims to quell investor panic after FTSE 100 suffered its worst day since 1987Moves aims to quell investor panic after FTSE 100 suffered its worst day since 1987
The US central bank is injecting $1.5tn into markets in a bid to quell investor panic after a day of turmoil that included the FTSE 100 suffering its worst day since 1987 and the European Central Bank inadvertently stoking alarm over the economic consequences of the coronavirus pandemic. Panic over the coronavirus on global financial markets amid the biggest market crash in a generation has forced the US central bank to inject trillions of dollars into bond markets in a dramatic attempt to prevent a repeat of the 2008 credit crunch.
The Fed said it would offer three blocks of $500bn into the repo market, which allows banks and financial institutions to exchange government bonds for cash, in a signal that the financial system has been coming under severe strain. In statement the FEd referred to “highly unusual disruptions” in the markets due to Covid-19. As stock prices plunged around the world on Thursday, with the London market suffering its worst day since the Black Monday crash of October 1987, the New York Federal Reserve said it would pump $1.5tn (£1.2tn) into the American financial system to stop markets from freezing up.
Stock markets in the US and Europe plunged on Thursday as Donald Trump’s unilateral ban on travel from 26 EU countries sparked renewed panic and investors looking for safe havens as they prepare for recessions across the world. It came after the European Central Bank failed to reassure panicked investors with a botched rescue package, as the coronavirus death toll climbs and more countries impose emergency travel bans and outlaw large public gatherings.
The US benchmark index, the S&P 500, clawed back losses after the Fed announcement to be down a still significant 7%, having triggered a halt in trading on Wall Street earlier in the day – the second in a week. The Dow Jones industrial average dropped by more than 2,100 points in morning trading to below 21,400 points, but was still 1,870 points down following the Fed intervention – down nearly 8% . The FTSE 100 index of leading UK company shares lost 10.87% on Thursday in the second biggest rout on record, taking total losses on the London market since mid-February – before the severity of the coronavirus outbreak became evident – to more than £540bn. The index closed down more than 600 points at 5,237, the lowest level since 2012.
Britain’s FTSE 100 index lost 10.87% on Thursday, its worst day since the market crash of 1987 and the second worst since it was founded at the start of 1984. The market value of companies listed on the FTSE 100 has fallen by more than £540bn since 21 February, before the severity of the coronavirus outbreak was evident. The Euro STOXX 600 index, which tracks all stock markets across Europe including the FTSE, fell by 11.48% – the worst day since it launched in 1998. The panic selling prompted by the coronavirus has wiped £2.7tn off the value of STOXX 600 shares since its all-time peak on 19 February.
The pound also suffered, falling 1.8% against the US dollar to $1.259 – its lowest since October – as investors sought safety. The rush to buy dollars also pushed down the euro by 1.5%, back below $1.11. “Today has been utterly brutal,” said Neil Wilson, chief market analyst of the online trading platform Markets.com. “Markets are at breaking point, there is a real systemic risk now with financial markets in complete turmoil over the coronavirus.”
The Euro Stoxx 600 index, which tracks the biggest listed companies in the UK and eurozone, fell by 11.5% in afternoon trading, putting it on course for its worst day ever. Italy’s FTSE MIB index lost 17%, its worst day ever. In the most significant intervention to date, the New York Fed said it would offer three blocks of $500bn into an arm of the financial markets which allows banks to exchange government bonds for cash. It came amid signals that the international financial system was coming under severe strain from some of the most extreme movements in stocks and bonds for a generation.
The widespread losses came despite the European Central Bank on Thursday becoming the latest central bank to unveil its response to the coronavirus outbreak, following the US Federal Reserve and the Bank of England, which announced an emergency cut in interest rates on Wednesday. Governments and companies use bond markets to borrow money from investors. In the 2008 credit crunch, banks stopped lending to one another as panic spread through the system. The Fed warned it had identified “highly unusual disruptions” amid widespread concern over the unfolding economic damage from Covid-19.
The ECB’s stimulus measures to try and prop up the economy included loosening restrictions on lending by eurozone banks and buying more private sector bonds. However, the move provided only a brief respite for share prices on Wall Street, with the Dow Jones Industrial Average plunging more than 8% and nearly 2,000 points by mid-afternoon in New York. The Dow was also on track for its worst day since 1987.
However, the ECB president, Christine Lagarde, did not unveil the interest rate cut expected by many – an acknowledgement of the limited room for manoeuvre for central banks after a decade of low interest rates. Instead, she called for eurozone governments to step in with increased spending. European markets suffered the steepest losses, with shares in France and Germany plummeting by 12%, in Spain by 14% and Italy – at the heart of the outbreak in Europe – falling by almost 17% in its worst day on record.
Lagarde said: “It’s clear to us that the economies of the world and the economies of the euro area are facing a major shock.” The trigger for market turmoil came after Donald Trump unveiled a unilateral ban on travel from 26 EU countries, sparking renewed stock market panic after a week of heavy selling pressure, as tensions rise between nations over the best way to respond to the virus.
Banks and other financial stocks were among the most heavily hit. In London, shares in Barclays fell by 17% to its lowest since 2009, as the financial crisis raged, and Lloyds Banking Group lost 12%. The pound also suffered, falling by about 2 cents against the US dollar to $1.259 – its lowest since October – as investors sought safety in the American currency, which is typically regarded as a safe haven during times of heightened financial turmoil. The rush to buy dollars also pushed down the euro by 1.5%, back below $1.11.
Europe’s Stoxx banks index fell by 15%, with Deutsche Bank shares falling 18% to a record low below €5. The widespread losses came despite the ECB becoming the latest global central bank to unleash emergency stimulus measures, following efforts by the Fed and the Bank of England, which announced an emergency cut in interest rates on Wednesday alongside Rishi Sunak’s expansionary budget.
The stimulus efforts also failed to sustain oil prices, which have been hit by fears over a recession and a price war between Saudi Arabia and Russia. Futures prices for Brent crude oil, the North Sea benchmark, fell by 7% to $33.30 per barrel. The stimulus measures to try to prop up the fragile eurozone economy included loosening restrictions on lending by banks in the currency bloc, and buying more private sector bonds.
Investors have rushed to put their money into the relative safety of government bonds. Yields on benchmark bonds, which move inversely to prices, have plummeted in recent weeks. The US 10-year Treasury yield fell back towards record levels, hitting a low of 0.636%. However, the ECB president, Christine Lagarde, did not unveil the interest rate cut expected by investors and called instead for eurozone governments to step in with increased spending.
Holger Schmieding, an economist at Berenberg investment bank, said the ECB would not be able to avert a recession in the eurozone. However, he said “the ECB package and further steps by bank supervisors as well as by fiscal policy, can limit second-round effects”. The normally sure-footed Lagarde came under fire after she refused to echo her predecessor, Mario Draghi, and say the bank would do whatever it takes to protect the eurozone from a recession.
He added: “The ECB today has made it even less likely that the severe Covid-19 shock to the real economy could morph into a financial crisis.” Referring to calls for the ECB to help ease borrowing costs for highly indebted eurozone countries, Lagarde said: “We are not here to close [bond] spreads, there are other tools and other actors to deal with these issues.”
The cost of borrowing for the Italian government soared, sparking fears of a repeat of the 2012 eurozone debt crisis when the then ECB boss, Draghi, declared he would do “whatever it takes” to preserve the euro.
Claus Vistesen, chief eurozone economist at the consultancy Pantheon Macroeconomics, said the ECB chief’s intervention was a “disaster” given the scale of the challenge facing the global economy.
“[Her] performance will go down as a catastrophic failure by part of the ECB. It is one of the world’s largest central banks, and today markets were crying out for a backstop; they got anything but,” he said.
Banking bosses from lenders including Barclays, HSBC, Lloyds and Natwest were summoned by Rishi Sunak and Mark Carney, the governor of the Bank of England, to discuss coordinated action to support small businesses.
The group of lenders, which also included Santander, Virgin Money and Danske Bank, confirmed they were making more than £20bn available for companies that needed emergency financing over the coming months.