Global Markets: Government bonds hammered as stocks resume slide

 Global stocks resumed a steep slide on Wednesday while bond markets rushed to price in the sheer scale of government support programmes and handouts announced over the past 24 hours, all aimed at softening the economic shock of coronavirus.

Dire trading conditions continued to make two-way trading difficult and exaggerated the moves, with the selloff in government bonds in particular drawing European Central Bank support for the Italian debt market.

U.S. dollar funding stresses remain evident, even if slightly easier since the U.S. Federal Reserve’s latest support for commercial paper and securities repurchase markets Tuesday.

Even the usual safe-haven assets, such as gold, got caught in the rout as battered investors looked to unwind their damaged positions while oil prices tanked to a 17-year low below $ 30.

“Another remarkable day in what is clearly fin-de-regime,” Rabobank’s global strategist Michael Every wrote in a note.

“Things have already irrevocably changed and whipsaw market action reflects that this is the case. The only issue is how much further they change from here, and hence where markets settle.”

European equity markets suffered hefty losses. London, Frankfurt and Paris plunged more than 5% and Milan slipping around 3%. [.EU] MSCI’s global stocks index dropped 1.4%.

The declines in Europe followed losses in Asia, where MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 4% to lows last seen in summer 2016, led by a 6.4% fall in Australia. Japan’s Nikkei dipped 1.7%.

Losses were set to extend to Wall Street. U.S. stock futures were indicating as much as 4% lower and hitting their daily low limit just a day after the S&P 500 rose 6% and Dow Jones rose 5.2%, or 1,049 points.

Bond markets joined the selling as liquidity vanished from European fixed income.

Italy’s debt found itself at the centre of the sell-off with borrowing costs soaring, on track for their biggest daily jump since the 2011 euro zone debt crisis. The rout quickly spread to Spanish, Portuguese and Greek yields. Safe-haven German 10-year debt yields jumped to two month highs at -0.2%.

In Europe, speculation grew around the issuance of joint euro zone “coronavirus” bonds or a European guarantee fund to help member states finance urgent health and economic policies.

“The liquidity situation is horrendous. What we see if liquidity is completely drying up when one-way selling starts and no one wants to take the other side,” Salman Ahmed, investment strategist at Lombard Odier.

“In the pre-crisis era, banks would step in and buffer the shock. Now there are no banks, only mutual funds which are having a run on their funds — it’s all impatient money.”

Big price swings have saddled market participants with losses, making them reluctant to get back into the market and thereby reducing trading volume.

Benchmark U.S. 10-year Treasury yield touched a three-week high of 1.2260 after the Federal Reserve eased some market jitters. U.S. 30-year bond yields climbed as high as 1.8440%.

“We are in the midst of the mayhem really, and I think there is still a risk that the increasing number of infections will keep markets on their toes,” said Hans Peterson global head of asset allocation at SEB investment management.

“It is hard to know how deep the recession will be, and as long as we have that situation it is hard to lift sentiment.”

BRIEF SUGAR HIGH

Wall Street had enjoyed a brief sugar-high on Tuesday after policymakers cobbled together packages to counter the impact of the virus.

The Trump administration announced a $ 1 trillion stimulus package that could deliver $ 1,000 cheques to Americans within two weeks to buttress a virus-stricken economy.

Britain launched a 330 billion-pound ($ 400 billion) rescue package for businesses threatened with collapse. France, which went into lockdown on Tuesday, is to pump 45 billion euros ($ 50 billion) into its economy to help companies and workers.

Still, forecasters at banks are projecting a steep economic contraction in at least the second quarter as governments take draconian measures to combat the virus, shutting restaurants, closing schools and calling on people to stay home.

Tuesday saw also the Fed step in again to ease corporate funding stress by reopening its Commercial Paper Funding Facility to underwrite short-term corporate loans.

In currency markets, the dollar extended its gains with the index against a basket of currencies up 0.6% at a near-three year high of 99.955.

The dollar also hit multi-year highs against both the Australian and New Zealand dollars, as companies and investors worried by the coronavirus outbreak headed for the world’s most liquid currency. The pound tumbled below 1.20 to the dollar, trading at its lowest level since October 2016.

Perceived safe havens such as the Japanese yen and the Swiss franc held their ground.

Oil prices fell as the outlook for fuel demand darkened, with travel blocked and social gatherings restricted.

U.S. crude was down $ 1.51 cents, or 5.6%, at $ 25.44 per barrel, having earlier fallen to $ 25.06, its lowest since late April 2003.