European stocks drop after Fed warns of slow coronavirus recovery

European stock markets fell on Thursday, as hopes for a quick recovery from the coronavirus pandemic faded after the head of the US central bank warned of long-term damage to the world’s biggest economy.

London’s FTSE 100 and Frankfurt’s Xetra Dax slumped 1.4 per cent, following Jay Powell’s comments on the severity of the economic downturn that is being caused by the virus.

“What was notable from his remarks was how he dwelled for some time on the permanent effects that a recession of such a large magnitude can have,” said analysts at Deutsche Bank.

The Fed chair’s comments come at a time when a resurgence in infections in countries further ahead in recovery from the virus has investors worried about the risk of a second wave, as lockdowns are relaxed across the world.

It was enough to damp investor optimism in Europe, despite the Italian government approving a €55bn fiscal stimulus package late on Wednesday and the Bank of England governor saying that additional bond purchases would be forthcoming.

Losses in Asia followed a rough day on Wall Street overnight as US stocks tumbled in the wake of the comments from Mr Powell, who cautioned that an economic recovery “may take some time to gather momentum”.

Hong Kong’s benchmark Hang Seng index fell 1.4 per cent, while Japan’s Topix index dropped 1.8 per cent and Australia’s S&P/ASX 200 shed 1.7 per cent.

South Korea’s Kospi index dropped 0.8 per cent after at least 120 people were confirmed as infected with Covid-19 in an outbreak linked to a nightlife district in Seoul. The development has underscored the difficulties in re-opening economies even after authorities appeared to have controlled the epidemic.

Futures markets pointed to further losses when trading begins on Wall Street later in the day, with the S&P 500 tipped to drop 0.3 per cent. The S&P 500 finished Wednesday down 1.7 per cent, as rising US-China tensions and uncertainty over the timeline for reopening the economy chiselled away at investor optimism.

Investors have also had to contend with a re-emergence of tensions between the US and China. Mr Trump this week ordered the US government’s main pension fund not to invest in Chinese stocks, prompting Beijing to warn Washington against turning frictions into a “financial fight”.

“Given the political incentive, Mr Trump may not be bluffing when he threatens to impose more tariffs as the ‘ultimate way’ to make China pay for the cost on America of the coronavirus outbreak,” said Chi Lo, Greater China economist at BNP Paribas Asset Management. 

The drop in Australian stocks on Thursday came as the country’s unemployment rate jumped to 6.2 per cent, the highest level in five years. The Australian dollar fell 0.3 per cent against the dollar to $0.6434, taking the currency’s losses to more than 8 per cent for the year.

Oil prices were buoyed by falling inventories and signs that Saudi Arabia will comply with its pledged production cuts. Brent crude, the international benchmark, was up 1 per cent to $29.49 per barrel, while West Texas Intermediate, the US market, rose 1.2 per cent to $25.58 a barrel.

Additional reporting by Daniel Shane in Hong Kong

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