Global markets: Here come the cavalry?

[March 03, 2020]  By Marc Jones and Karin Strohecker

LONDON (Reuters) - A recovery in world stock markets and oil prices picked up pace on Tuesday, as global policymakers signalled a united front to address the economic fallout from the spreading coronavirus.

Europe's main bourses surged nearly 3% in what looked set to be the region's best day since 2016 as dealers rediscovered their appetite for risk and jettisoned safe but low profit assets..

The reason? The cavalry. Finance ministers from the G7 and central bank governors will hold a conference call on Tuesday (1200 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, but for investors it was a reassuring signal.

"The market is very much wanting a coordinated 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 mild selloff in super-safe government bonds came after yields on benchmark U.S. Treasuries hit record lows in recent days as worries mounted about a potential global recession.

The decision to hold a G7 call came after the head of the European Central Bank, Christine Lagarde, on Monday joined the chorus of heavyweight central bank chiefs signalling a readiness to deal with the threat from the outbreak.

Earlier messages from the U.S. Federal Reserve that it was prepared to act continued to weigh on the dollar, having fuelled expectations of a sizable rate cut at its meeting in two weeks.

Against the yen, the dollar lost 0.4% to 107.95 yen, slipping towards a five-month low of 107 set on Monday.

Lagarde's comments meant the euro was a shade lower at $1.1111, having hit an eight-week peak of $1.1185 in the previous session after a string of other top ECB policymakers said the bank was still assessing the situation.

The Australian dollar, which is seen as a proxy bet on China due to the raw materials it sells there, sat above a recent 11-year trough largely on short covering after its central bank cut interest rates earlier in the day.

Oil prices gained another 2% after a jump of more than 4% on Monday. U.S. West Texas Intermediate crude futures went to $47.8 a barrel while Brent crude stood at $52.9. [O/R]

The improved sentiment helped U.S. S&P 500 futures climb as much as 1%. MSCI's world stocks index was up 0.6% having scored its best day since 2011 on Monday after a roaring Wall Street pushed it up just over 3%.

Asia-Pacific shares outside Japan ended 0.8% higher, off earlier peaks 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.

A man walks past an electronic board showing stock prices outside a brokerage in Tokyo, Japan, January 4, 2017. REUTERS/Kim Kyung-Hoon

"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 Fed Chair Jerome Powell and Bank of Japan Governor Haruhiko Kuroda to flag a readiness to move.

"It is reasonable to expect a response that reflects a combination of fiscal measures and central bank initiatives," Bank of England Governor Mark Carney said on Tuesday.

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 Fed's March 17-18 meeting as well as a 0.10 percentage point cut to the ECB's minus 0.5% key rate at March 12 meeting.

The frantic moves by policymakers reflected growing fears about the disruption to supply chains, factory output and global travel caused by the new epidemic just as the world economy was trying to recover from the effects of the U.S.-China trade war.

Coronavirus, which has already claimed more than 3,000 lives, now appears to be spreading much more rapidly outside China than within the country. That leads the world into uncharted territory, although the World Health Organization has so far stopped short of calling it a pandemic.

U.S. bond yields rolled back some of their sharp falls.

The 10-year U.S. Treasuries yield moved to 1.15% from a record low of 1.030% marked on Monday. The two-year notes yield jumped back to 0.87% from a 3 1/2-year low of 0.710%, though yields on the most rate-sensitive short term notes continued to drop.

April Fed funds rate futures still price in about 80% chance of a 0.50 percentage point cut this month and a total of almost 1 percentage point cuts by the end of year.

(Reporting by Marc Jones and Karin Strohecker, additional reporting by Hideyuki Sano; Editing by Philippa Fletcher and Catherine Evans)

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