In a Week of Stock Market Horror, Friday the 13th Brings Relief

(Bloomberg) --

It took Friday the 13th for European stock markets’ sharpest sell-off in history to hit the brakes.

The Stoxx Europe 600 Index closed with gains on the final day of a tumultuous week as policymakers stepped up their response to the fallout from the coronavirus, with Germany pledging “billions” in a shift from its long-standing balanced-budget stance. That helped ease European equities’ worst weekly drop since 2008.

Panic gripped financial markets this week, which began on a grim note as Saudi Arabia launched a price war in oil, adding to virus worries. Failed attempts at a rebound in subsequent sessions culminated in a meltdown on Thursday, with the Stoxx 600 slumping the most on record after a U.S. travel ban and disappointing monetary policy response in Europe. The benchmark is now down 31% since last month’s peak.

“It is becoming increasingly clear that the market is waiting for one thing and one thing only: positive news regarding the coronavirus,” said Merck Finck’s chief strategist Robert Greil.

Markets remained volatile even as the week drew to a close, with the Stoxx 600 giving up a big chunk of its intraday gains in the final hour of trading on Friday after a report that U.S. President Donald Trump plans to declare a national emergency. The benchmark had rallied 8.8% after Germany’s pledge to spend whatever necessary to protect its economy and the European Commission said it’s ready to green light widespread fiscal stimulus for euro nations.

Here are five charts illustrating this week’s wild ride:

Global oil benchmarks in London and New York wiped out more than a quarter of their value in the first minutes of Asian trade Monday after OPEC+ talks failed to reach a deal and Saudi Arabia slashed the price of its crude. Energy shares in Europe plunged, capping their biggest weekly drop on record.

The 31% plunge over the course of 17 trading days wiped out more than $4 trillion in market value for Stoxx 600 shares. The speed of the sell-off overtook those seen around trigger events such as the collapse of Lehman Brothers, the Brexit vote, Fukushima, Russia’s debt crisis, the Iraq wars, the dotcom bubble, the 9/11 terror attacks and the euro-area debt crisis.

With equity markets posting big moves on almost every day, the built-in circuit breakers for S&P 500 futures were triggered multiple times this week. In Europe, Spain and Italy temporarily banned short selling as another measure to reign in market volatility.

Several market participants warn that a recession is on the cards, given the outbreak’s impact. After the sharp sell-off in stocks, a lot of economic weakness is already in the price. The question is whether that’s enough. The Stoxx 600 is currently pricing a drop in PMIs to 36 points, which suggests a short global recession is already reflected, according to analysts at Bank of America Corp. Should PMIs only fall to 46, as their base case suggests, the benchmark has a 25% upside.

For those who aren’t yet ready to wade back into equities, a niche asset class may offer more protection. “Global convertible bonds showed strong resilience on the downside this year,” said Salm-Salm & Partner portfolio manager Frederik Hildner. As bonds with a built-in call option, they offer some exposure to equity markets, and are largely in the hands of investors with long-term views, which helped to balance flows in that wild week, Hildner says.

--With assistance from Ksenia Galouchko.

To contact the reporter on this story: Jan-Patrick Barnert in Frankfurt at jbarnert3@bloomberg.net

To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, Namitha Jagadeesh, Blaise Robinson

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