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Trump Sell-Off Shows Fear Governments Can’t Save Markets

Trump Sell-Off Shows Rising Fear Governments Can’t Save Markets

(Bloomberg) -- For weeks, investors have been pleading for governments to shore up a global economy ravaged by the coronavirus. But after the biggest wave of stimulus announcements since the outbreak began, fear is mounting the efforts might not provide the salvation markets are looking for.

Emergency measures in the U.K., Italy and Australia, along with a commitment from Germany’s Angela Merkel to do “whatever is necessary,” were met with fresh waves of selling in stocks, putting the MSCI All-Country World Index on the brink of a bear market. The gloom veered toward panic after President Donald Trump announced an underwhelming set of U.S. support measures and restricted travel from Europe.

More disappointment was to follow, when the European Central Bank left rates unchanged in favor of a temporary expansion of bond purchases. The Stoxx Europe 600 tumbled the most on record while U.S. equities plunged 8%, extending losses after a 15-minute NYSE-mandated halt.

Trump Sell-Off Shows Fear Governments Can’t Save Markets

While government stimulus helped bring an end to the global recession triggered by the financial crisis, investors are increasingly skeptical whether policy makers can forestall a virus-induced downturn. Fiscal and monetary measures may only help with the knock-on effects of the epidemic’s widespread shutdown of economic activity, leaving investors little option but to await the subsiding of the virus itself.

“The central bank ‘put’ has established a floor under risk assets for the past decade. This is the first time that markets are seriously questioning whether it will work again,” Jason Daw, a strategist at Societe Generale SA in Singapore, wrote in a note Thursday. “While fiscal policy is better medicine than monetary, neither are properly equipped to mitigate the coronavirus-induced growth shock.”

Error-laden announcements added to Thursday’s tumult. Trump’s initial comments suggested restrictions on both travel and trade from Europe, while subsequent clarifications emphasized it applied just to people. Even then, the news underscores how steps to slow the spread of the disease unavoidably also hammer businesses, and so corporate earnings and stock-market valuations.

Trump spoke little more than an hour after his Australian counterpart, whose own announcements similarly failed to assuage equity investors. Prime Minister Scott Morrison formally announced nearly A$18 billion ($11.6 billion) in stimulus. The S&P/ASX 200 Index, which had opened in the red, saw losses more than double at one point, to almost 8%.

Trump Sell-Off Shows Fear Governments Can’t Save Markets

The ECB, for its part, left its deposit facility rate and its main refinancing rate unchanged, while it added 120 billion euros ($135 billion) of net asset purchases through the end of 2020. Shares of banks nevertheless extended their drop to 12%.

Stocks extended losses as ECB President Christine Lagarde put the ball in the court of European governments. She urged a coordinated fiscal response and said the virus’s implication for inflation is highly uncertain.

Yet the German chancellor’s pledge to pull out all stops to contain the economic damage from the virus failed to impress markets. Merkel and her economic team are ready to give up a balanced budget to pay for containment measures, according to people with direct knowledge of the government’s economic policy.

Trump Sell-Off Shows Fear Governments Can’t Save Markets

The U.K.’s coordination of fiscal and monetary initiatives didn’t do much to stem the slide in the nation’s stocks either. The Bank of England cut interest rates by half a point on Wednesday, when the U.K. government also pledged a 30 billion pound ($39 billion) emergency boost to spending.

One market where authorities are proving purposefully unhelpful is oil. With Saudi Arabia and Russia battling for market share, that’s provided a double whammy, alongside the hit due to sliding demand as global growth decelerates.

West Texas Intermediate crude has tumbled by roughly half from the high in January.

Trump Sell-Off Shows Fear Governments Can’t Save Markets

Trump’s actions might not have forestalled a bear market for U.S. stocks, but in another market things have moved in a more favorable direction. The dollar, which Trump has long said was strong and hurting U.S. competitiveness, is on the retreat -- at least against the euro and yen. Losses for emerging-market currencies make the dollar index a more equivocal play.

Trump Sell-Off Shows Fear Governments Can’t Save Markets

The asset that for the moment stands out as potentially less responsive to fear and panic is gold. The traditional haven asset climbed as the coronavirus spread around the world, but it’s come off of the high it reached Monday.

Trump Sell-Off Shows Fear Governments Can’t Save Markets

--With assistance from Cormac Mullen, Tian Chen, Jeanny Yu, Lucille Liu, Lilian Karunungan and Namitha Jagadeesh.

To contact the reporter on this story: Joanna Ossinger in Singapore at jossinger@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Michael Patterson, Cecile Gutscher

©2020 Bloomberg L.P.