Mounting concerns about the economic impact of the new coronavirus outbreak saw gains in European stock markets wiped out Monday despite hopes of stimulus measures from major central banks.

Wall Street was set to post more losses at the opening bell, coming on top of last week’s drop, which was the worst since the global financial markets over a decade ago. The mood across Europe turned sour after greater optimism in Asia, where some markets posted strong gains.

Britain’s FTSE 100 was down 0.2 per cent to 6,555 while the CAC 40 in Paris declined 1.2 per cent to 5,244. Germany’s DAX did worse than its counterparts, falling 1.3 per cent to 11,735.

In Toronto, the S&P/TSX composite index was down 454.39 points to 16,263.05 in mid-morning trading, though the Dow Jones, S&P 500 and Nasdaq were up.

The catalyst for the renewed bout of selling appeared to centre on a downbeat economic assessment from the Organization for Economic Cooperation and Development. As well as warning that the global economy could shrink in the first quarter of this year as a result of the outbreak, the OECD slashed its global growth forecast for this year. It now expects the global economy to grow by 2.4 per cent, half a percentage point less than it previously thought, and warned it could be as low as 1.5 per cent if the virus lasts long and spreads widely.

That bleak assessment sidelined budding hopes in the markets that the world’s central banks, particularly the U.S. Federal Reserve, could be stung into action and cut interest rates or provide financial liquidity.

Central banks say they’re poised to help

On Friday, Fed chairman Jay Powell said the central bank stood ready to help the economy if needed. Investors increasingly expect the Fed to cut rates at its next policy meeting in mid-March, possibly even before. His hint of looser policy weighed on the dollar. On Monday, the euro was up 0.8 per cent to $1.1113 while the dollar fell 0.3 per cent to 107.70 yen.

And Bank of Japan Governor Haruhiko Kuroda likewise issued a statement Monday, after an early plunge in share prices, saying the central bank “will closely monitor future developments, and will strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases.”

“For all the talk of lower rates the one thing a rate cut can’t do is get people back to work and supply chains back running again– Michael Hewson, chief market analyst, CMC Markets

Given that the main economic impact so far of the virus outbreak is on the supply side of economies rather than on the demand side, questions are being asked as to whether looser monetary policy will have any meaningful impact.

“For all the talk of lower rates the one thing a rate cut can’t do is get people back to work and supply chains back running again,” said Michael Hewson, chief market analyst at CMC Markets.

“You also have to confront the possibility that simple rate cuts might be the policy equivalent of turning a garden hose onto a mild wildfire. It might dampen it for a while, but it would do little to address the underlying issue itself. That requires benevolence on the part of banks in terms of easier credit terms and forbearance, as cash flow problems start to pile up, for companies in difficulty.”

Stimulus hopes nevertheless helped shore up markets in Asia earlier. The Nikkei 225 index closed one per cent higher at 21,344.08, while the Shanghai Composite index rose 3.2 per cent to 2,970.93. The benchmark for the smaller exchange, in Shenzhen, jumped 3.8 per cent, while South Korea’s Kospi climbed 0.8 per cent to 2,002.51. The Hang Seng in Hong Kong climbed 0.6 per cent to 26,291.68, while India’s Sensex gave up early gains, losing 0.4 per cent to 38,159.11.

The virus outbreak that began in central China has rattled markets as authorities shut down industrial centres, emptying shops and severely crimping travel all over the world. Companies are warning investors that their finances will take a hit because of disruptions to supply chains and sales. Governments are taking increasingly drastic measures as they scramble to contain the virus.

Chinese economy takes big hits

The economic fallout is becoming increasingly evident in China, which has seen most of the 90,000 or so virus cases worldwide. The latest data showed China’s manufacturing plunged in February as anti-virus controls shut down much of the economy. A monthly purchasing managers’ index released Monday by Caixin magazine fell to 40.3 from January’s 51.1 on a 100-point scale on which numbers below 50 show activity contracting. A separate PMI released Saturday by the National Bureau of Statistics and the China Federation of Logistics & Purchasing fell to 35.7 from January’s 50.

Last week’s rout knocked every major index into what market watchers call a “correction,” or a fall of 10 per cent or more from a peak. The last time that occurred was in late 2018, as a tariff war with China was escalating. Many market watchers have said for months that stocks were overpriced and long overdue for another pullback.

The scale of the selling is staggering. The Dow, for example, fell 3,583 points, or 12.4 per cent last week. Meanwhile, the S&P 500 notched up a weekly loss of 11.5 per cent, its biggest since an 18.2 per cent drop in the week ending October 10, 2008 at the height of the global financial crisis.

Oil prices have also slumped as traders price in the prospect of lower demand as a result of the virus outbreak. Last week, oil prices tanked by around 15 per cent. On Monday, a barrel of crude on the New York Mercantile Exchange was up 0.8 per cent at $45.12 while a barrel of Brent, the international standard, rose 1.1 per cent at $50.21.

On the flip side, bond prices have been soaring as investors seek safety, pushing yields to record lows. On Monday, the yield on the 10-year Treasury note, a benchmark for home mortgages and many other loans, was at a record low 1.09 per cent, down from 1.14 per cent Friday and 1.30 per cent late Thursday.

In other trading, gold, another safe haven for investors, jumped 2.5 per cent to $1,600 per ounce, silver picked rose 2.4 per cent to $16.85 per ounce.

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