- The Bank of England cut interest rates by 50 basis points on Wednesday.
- The central bank cited a “marked deterioration” in risk appetite and the growth outlook, and markets signalling “extreme levels” of uncertainty.
- The emergency cut lifted European stocks, but US futures, Asian stocks, Treasuries, and oil slumped on coronavirus fears.
- “In the short term this could spook markets, showing as it does the severity of the coronavirus epidemic,” one analyst said of the rate cut.
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European stocks rose on Wednesday after the Bank of England followed the Federal Reserve in making an emergency cut to interest rates of 50 basis points. US futures, Asian stocks, Treasuries, and oil slumped as investors feared that central banks and governments would fail to contain the coronavirus epidemic and its economic fallout.
The Bank of England cut rates from 0.75% to 0.25%, tempered capital requirements for banks, and promised cheaper funding to support lending as the coronavirus threat grows. The central bank noted a “marked deterioration in risk appetite and in the outlooks for global and UK growth,” and warned that markets were signalling “extreme levels” of uncertainty.
The surprise cut came hours before the unveiling of the UK government’s annual budget. Chancellor Rishi Sunak is expected to greenlight a sharp rise in public borrowing as the nation navigates the Brexit transition and coronavirus outbreak.
“The Bank of England fired its big bazooka today, but it’s really an appetizer for the main course later,” Neil Wilson, chief market analyst for Markets.com, said in a morning note.
“Unlike the Fed, which shot its bolt early, this is clearly part of a major coordinated response to the coronavirus pandemic with a twin-pronged monetary and fiscal package,” he added.
However, other analysts warned the cut could have limited benefits, and might even backfire.
Naeem Aslam, chief market analyst at AvaTrade, described it as a “drop in an ocean” in a Wednesday note. He doubted it was “enough to soften the blow at all.”
“In the short term this could spook markets, showing as it does the severity of the coronavirus epidemic,” Adam Vetesse, an analyst at eToro, said in a morning note.
Coronavirus – which causes a flu-like illness called COVID-19 – has infected more than 119,000 people killed at least 4,200, and spread to upwards of 100 countries. Italy, which locked down its entire 60 million population this week, has 10,000 confirmed cases. The US has racked up more than 1,000 cases so far.
Here’s the market roundup as of 10:20 a.m. in London (6:20 a.m. in New York):
- European equities opened higher, with Germany’s DAX up 1.7%, Britain’s FTSE 100 up 0.9%, and the Euro Stoxx 50 up 2%.
- Asian indexes closed lower. China’s Shanghai Composite fell 0.9%, South Korea’s KOSPI slumped 2.8%, Japan’s Nikkei dropped 2.3%, and Hong Kong’s Hang Seng fell 0.9%.
- US stocks are set to open lower. Futures underlying the Dow Jones Industrial Average, the S&P 500, and the Nasdaq fell between 1.8% and 2%.
- Oil prices fell, with West Texas Intermediate down 3% at $US33.30 a barrel and Brent crude down 3% at $US36.10.
- The 10-year Treasury yield slid to about 0.71%.
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