US stock sell-off wipes out gains for the week

US equities dropped for a second straight week, as investors took stock of the damage being done to business by the coronavirus crisis following a slew of corporate earnings.

The S&P 500 closed lower by 2.8 per cent on Friday, erasing its gains for the week. The Nasdaq Composite came under pressure as well, dropping 3.2 per cent following red flags in overnight results from Amazon and Apple, two pivotal companies in a tech sector that has led the US market’s rebound in recent weeks.

Amazon warned that the cost of hiring new workers and protecting them from the virus could leave it with an operating loss in the second quarter — a disclosure that sent its shares lower by more than 7 per cent on Friday. Apple also nodded to the uncertainty of the economic outlook, withholding guidance for the current quarter. Its shares fell over 1 per cent.

“When we hear from the likes of bigger tech companies in terms of how hard it is to predict even the next quarter, that brings the risks back to the forefront,” said Marvin Loh, senior global markets strategist at State Street Global Markets.

Investors were also rattled after President Donald Trump escalated his attacks against China at a White House coronavirus briefing on Thursday, saying he had seen strong evidence that Covid-19 originated from a laboratory in Wuhan. The president also raised the prospect of using tariffs against Beijing, but denied a US media report that he was considering cancelling US debt held by China.

“The last thing the financial markets need now as they grapple with Covid-19 is a renewal of the trade war between the US and China,” said Derek Halpenny, head of European markets research at MUFG.

London’s FTSE 100 closed down 2.3 per cent while most bourses on continental Europe were shut for a public holiday. Japan’s Topix fell 2.2 per cent and the S&P/ASX 200 benchmark in Australia, a country heavily exposed to trade with China, dropped 5 per cent.

The S&P’s decline for the week was 0.2 per cent and the Nasdaq was 0.3 per cent lower. Despite a mixed end to the month, US stocks in April registered their biggest monthly gain since 1987, emboldened by hopes of a potential treatment for Covid-19 and the prospects for ending lockdowns in the US and Europe.

Mr Loh attributed that rally in part to the US Congress and the Federal Reserve extending enormous support to the economy and financial markets in the form of relief packages and emergency lending measures.

“There has been a floor put under the market by the massive amount of liquidity being injected into the financial system,” he said. “It is an encouraging sign for investors that we can really avoid falling off a cliff.”

Friday marked a rare moment of relative stability in oil markets, however. The international benchmark Brent rose roughly 5 per cent to $26.57 a barrel, while US marker West Texas Intermediate climbed about the same to $19.80.

First-quarter data released this week showed the US economy shrank by its fastest rate since the 2008 financial crisis, while the eurozone contracted at its quickest pace on record.

“We now have a foretaste of the impact of the virus and the resulting shutdown,” said Ethan Harris, Bank of America’s global economist, in a note to clients. China’s experience suggests “a similar or worse outcome” for the US and Europe in the second quarter, he added.

Markets in mainland China, Hong Kong and South Korea were closed for public holidays, but in foreign exchange markets, China’s renminbi weakened to its lowest level since early April against the US dollar. The offshore-traded renminbi slipped 0.7 per cent at one point to Rmb7.13 per dollar, its sharpest move since March.

The Chinese currency “is about to get caught in a fresh US-China imbroglio”, wrote Alan Ruskin, an analyst at Deutsche Bank, in a recent note. “We have reached a particularly sensitive impasse as it relates to the virus narrative, and it is certainly not in China’s interests to encourage currency weakness,” he added. 

Line chart of Offshore-traded renminbi per US dollar showing China's currency falls as tensions rise

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