Global stocks fell sharply on Thursday after the Federal Reserve offered a dire assessment of US economic prospects and concerns grew over a second wave of coronavirus infections.
Shares on Wall Street tumbled at the opening bell, with the benchmark S&P 500 falling 2.8 per cent — putting it on course for its biggest daily fall since early May — and the tech-heavy Nasdaq down 2.3 per cent.
In Europe, the UK’s FTSE 100 stock index was on track for its worst day since April, falling 3 per cent by mid-afternoon in London. The Stoxx 600 index, Europe’s regional benchmark, was heading for its fourth consecutive session of losses, down 3.6 per cent.
The setback to the global stock rally came after the Fed said on Wednesday that the world’s largest economy faced a long path to recovery from the pandemic. Nearly all of the central bank’s top officials expect to keep interest rates close to zero until the end of 2022.
Data released before Wall Street open showed that US jobless claims slowed last week, but the unemployment rate remains at historically high levels, reflecting the significant economic damage caused by the pandemic and lockdowns to stop its spread.
“The Fed remains deeply concerned about the trajectory of the recovery,” said Anna Stupnytska, head of global macro at Fidelity International. She added that “risks related to subsequent waves of infection, the upcoming elections, weak global recovery and trade tensions” would probably complicate the path to recovery.
Jay Powell, the Fed chair, said he was “not even thinking about thinking about raising rates”, adding that he was concerned the jobs market might struggle to recover even as lockdown restrictions were eased.
Government bonds rallied as investors sought safer parts of the market. The yield on the benchmark 10-year US Treasury fell 0.066 percentage points to 0.6804 per cent as prices rose.
Some investors said the sell-off in stocks had more to do with nerves over stretched valuations, after a breathtaking rally saw US markets all but erase their coronavirus-related losses.
“Equities are selling off despite the Fed, not because of the Fed,” said Paul O’Connor, head of the multi-asset team at fund manager Janus Henderson Investors. “Market sentiment has soared alongside the recent rally in stocks and some forms of speculative activity are the highest seen in years.”
Concerns over another wave of infections, particularly in the US, have also harmed sentiment, analysts said. States across the west and south, which loosened their lockdowns weeks ago, are seeing a sudden jump in new cases.
“While the worst of the job losses might be behind us, the recent surges in new Covid-19 cases in states such as Texas and Arizona could stall the nascent recovery if not brought under control,” said Ronald Temple, head of US equities at Lazard Asset Management.
Shares that are sensitive to renewed health concerns led the declines in Europe, with the Stoxx Europe travel and leisure sector falling more than 5 per cent. Carnival, British Airways owner IAG and Cineworld were among the region’s biggest fallers.
Richard McGuire, a strategist at Rabobank, said markets had been largely ignoring the “reality that a second wave could crush signs of economic progress being made in some countries as they open up”.
A sell-off in the US dollar paused on Thursday, with the dollar index, which measures the currency against a basket of its global peers, rising 0.2 per cent of three-month lows.
Kit Juckes, a strategist at Société Générale, expects the dollar to weaken further as the Fed keeps interest rates low.
He pointed to the years following the dotcom crash, when the central bank continued easing even as the economy recovered. This led to a 40 per cent fall in the value of the dollar over six years, he said. “The Fed’s going to give us a weaker dollar over the coming years, even if the short-term is bound to be messy,” he said.
Shares in Asia-Pacific fell, led lower by a 3 per cent drop in Australia’s S&P/ASX 200 and a 2.2 per cent decline in Japan’s benchmark Topix.
Oil prices were under pressure after weekly US data showed crude inventories rose to a record high and concerns over economic growth grew. Brent crude, the international benchmark, fell 5.7 per cent to fall back below $40 per barrel a barrel, while West Texas Intermediate, the US marker, dropped 6.8 per cent to $36.90.
“Prices are once again under pressure as concerns over the pace of the demand recovery intensify,” said Paola Rodriguez Masiu, an analyst at Rystad Energy.