US stocks slipped on Wednesday after the chair of the Federal Reserve warned that the coronavirus pandemic risked causing long-term damage to the economy.
The US may need to deploy “additional policy measures” to avoid an “extended period of low productivity growth and stagnant incomes”, Jay Powell said. “The recovery may take some time to gather momentum.”
The S&P 500 closed down 1.7 per cent, after falling as much as 2.7 per cent earlier in the session. The tech-heavy Nasdaq shed 1.6 per cent.
Wall Street has clawed back from its March lows as investors took heart from fiscal and monetary stimulus unleashed to try to counter the effects of coronavirus lockdowns.
But Mr Powell’s remarks, made during a virtual event with the Peterson Institute for International Economics in Washington, resurfaced concerns over the medium-term toll of the pandemic.
Edward Moya, senior market analyst at Oanda, said the comments sent a signal that the economic recovery would be much slower than everyone was expecting.
“The harsh economic reality appears to finally be capping off the tremendous stock market rebound from the March lows,” Mr Moya said. “Too many uncertainties persist as to when economic activity will return and be sustained.”
According to Chris Iggo, chief investment officer for core investments at Axa Investment Managers, the Fed was limited in its capacity to shore up the economy single-handed.
“The government has a role to play in providing more persistent stimulus to the economy, particularly when companies are facing solvency issues,” he said. “It’s really the combination of monetary and fiscal policy that is important.”
The rally in global markets had begun to falter before the Fed chair spoke, under pressure from rising US-China tensions and concerns over the timeline for reopening economies during the coronavirus pandemic.
European stocks fell, with London’s FTSE 100 down 1.5 per cent, and the Stoxx 600 index, which offers a snapshot of the region’s largest companies, 1.9 per cent lower.
Sterling was little moved by official data showing that the UK economy shrank at the fastest monthly pace on record in March, although it reversed earlier gains to trade down 0.3 per cent against the US dollar at $1.222.
Global equities have rallied through some of the worst economic data in recorded history, as investors welcomed central bank support and focused on the gradual reopening from pandemic-imposed lockdowns.
But the rebound remains sensitive to concerns that a second wave of infections will hobble efforts to swiftly reopen economies. China and South Korea have already seen renewed clusters of coronavirus cases.
The yield on the benchmark 10-year US Treasury fell 0.04 percentage points to 0.65 per cent, as investors moved into safer assets.
“Equity and fixed income markets may have begun healing from their March panic, but they continue to face headwinds,” said Andrew McCaffery, chief investment officer of Fidelity International.
Investor sentiment has also been dented by the re-emergence of trade tensions between Washington and Beijing.
On Tuesday, Donald Trump, US president, ordered the main federal government pension fund, which manages almost $600bn on behalf of federal employees, not to invest in Chinese companies, citing the risk of “future sanctions” over Beijing’s handling of the coronavirus pandemic. The White House said investment in Chinese companies would expose the retirement funds to “significant and unnecessary” risk.
“I think [the] action will have a negative impact at the margin in terms of dampening some flows into Chinese assets, and some other markets may follow,” said Colin Harte, portfolio manager at BNP Paribas Asset Management.
Markets in Asia recovered some earlier losses towards the end of the trading day. China’s CSI 300 index of Shanghai and Shenzhen-listed stocks gained 0.2 per cent, while Japan’s Topix shed 0.1 per cent and Hong Kong’s Hang Seng index fell 0.3 per cent.
A bright spot in the region was India’s Sensex index, which climbed 2 per cent after Narendra Modi, the prime minister, on Tuesday announced a $266bn stimulus package for the country’s economy.
The recent rally in oil prices fizzled out on Wednesday even though US crude inventories posted their first weekly decline since January.
West Texas Intermediate, the US marker, was down 1.9 per cent at $25.29 a barrel, having gained almost 7 per cent a day earlier. Brent crude, the international benchmark, fell 2.6 per cent to $29.19 a barrel.