European Stocks End at 7-Year Low After Fed Fails to Calm Market

(Bloomberg) -- European equities ended at their lowest level in seven years as mounting fears over the economic damage from the spreading coronavirus heightened despite the U.S. Federal Reserve’s actions.

The Stoxx Europe 600 Index tumbled as much as 10% during the session, before trimming losses in afternoon trading after the European Commission president proposed a restriction on non-essential travel to the European Union in an effort to limit the spread of the coronavirus. The benchmark, which has plummeted 34% since its February peak, closed down 4.9% at a level not seen since mid-2013.

European leaders are racing to reduce the fallout from the pandemic, which has erased about $20 trillion from global equities amid concerns about the damage to growth and earnings.

European Stocks End at 7-Year Low After Fed Fails to Calm Market

While the Fed on Sunday slashed its benchmark interest rate by a full percentage point to near zero and other central banks strengthened efforts to stabilize capital markets, investors remain concerned about the growing economic fallout from the virus.

“The equity markets fear that the Fed might know something investors do not know,” said Ulrich Urbahn, head of multi-asset strategy and research at Joh Berenberg Gossler & Co. “Moreover, there is skepticism about the extent to which further rate cuts can help the economy. Investors want to see fiscal policy action.”

Air France-KLM ended the session down 10% while International Consolidated Airlines Group SA plummeted 27% and EasyJet Plc sank 19%. The Stoxx travel & leisure sector index has tumbled 49% since the start of the market rout last month.

Here’s what investors and strategists are saying about today’s market:

Slow Intervention

“Despite most central bankers doing all they can to help through coordinated action, it is fiscal policy that is ultimately needed. However, this intervention has been slow,” said Amlan Roy, head of global macro policy research at State Street Global Advisors. “The current ecosystem the world is currently faced with is different to any other financial crises or recessions.”

Strong Nerves Required

“The economic impacts are likely to be significant; and any bounce-back as the year wears on may not bring bourses back to immediately preceding levels,” said Paul Markham, global equities portfolio manager at Newton Investment Management. “A strong nerve will be required and it may well get darker before we see the light; but, for those taking a long-term view, attractive entry points are beginning to emerge.”

Avoid Leverage

“The market situation is a very difficult situation,” said Wells Fargo strategists, including Christopher Harvey, “The tough steps to mitigate the coronavirus are occurring -- though only time will tell. High quality is the way to go and we recommend avoiding levered situations as they may have going-concern problems with the stress in credit markets.”

Deep But Short

“Any way you look at it, it’s now almost certain that there will be a coronavirus-triggered recession as both global supply and demand are impacted,” said Nigel Green, CEO and founder of DeVere Group. “We can expect this recession to be deep, but short. The slowdown will be temporary because it’s not caused by deep-rooted problems and imbalances in the economy, rather by a wholly unexpected shock that’s gripped the world.”

Buying Time

“This is buying time to assess reality. The Fed has again proven its agility and willingness to protect consumer confidence from Covid-19 economic fallout, something other central banks failed to do thus far,” said Frederik Hildner, a portfolio manager at Salm-Salm & Partner “The arm-wrestling of markets and institutions goes into its next round.”

Yield Curve

“Eventually, the steepening of the yield curve, which might be starting now, could become a positive catalyst, but it needs a sustained bounce in 10-year yields, and a significant amount of time needs to pass from the point of emergency Fed cuts for this to be the case,”said JPMorgan strategists led by Mislav Matejka. “This is because the inter-meeting Fed cuts were also typically a negative signal for the market.”

Improving Prospects

“We remain of the view that beyond short-term panic from weak hands, prospects are starting to improve in a decisive way for risk assets altogether,” said Stephane Barbier de la Serre, strategist at Makor Securities. “Beyond monetary efforts, markets are still focusing essentially on the fiscal policy tool. More concrete announcements are expected today onwards on that front.”

©2020 Bloomberg L.P.

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