U.S. stocks sank further as investors awaited progress on a congressional spending package to tackle the fallout from the coronavirus pandemic. Measures of corporate credit risk eased and the dollar fell after the Federal Reserve announced a massive second wave of initiatives to support a shuttered American economy.
The S&P 500 fell as much as 4.9% as lawmakers failed to agree on a stimulus bill over the weekend. Negotiations continued after Democrats blocked the first effort. The index is down almost 35% from its Feb. 19 record and is headed for the lowest close of Donald Trump’s presidency. The Dow Jones Industrial Average dropped as much as 5%, losing all its gains since he was elected on Nov. 8, 2016.
“Fiscal is far more important than the Fed in stabilizing risk assets,” said Dennis DeBusschere of Evercore ISI. “That being said, as the Fed gets more creative, they can become much more relevant. They are going to buy everything.”
The central bank said it will buy an unlimited amount of bonds to keep borrowing costs low and will set up programs to ensure credit flows to corporations and state and local governments. Spreads on credit default swaps tightened and bond ETFs eligible for Fed purchases rallied.
“The Fed has really rallied to do as much as it can to extend its reach, but I think at the end of the day, the markets recognize this requires a fiscal response,” said Nela Richardson, an investment strategist at Edward Jones. “Every time the Fed takes a strong step forward there’s a kind of, ‘Oh no, this is worse than anyone thought’ reaction in the market.”
The Stoxx Europe 600 fell as the continent’s leaders scrambled to enforce more curbs on people’s movements and Italy began shutting most industrial production. Core European bonds climbed. Equities fell earlier across most of Asia, where India’s benchmark plunged a record 13% while the rupee sank to the lowest ever amid moves to lock down widespread areas of the country. Brent crude extended losses after its 20% decline last week, while West Texas crude fluctuated.
Investors are beginning another dramatic week digesting slashed economic forecasts and news of Europeans struggling to curb the pandemic, with Italy and Spain reporting 2,000 deaths over the weekend between them. Warnings grew that a global recession is coming as cities from New York to Los Angeles all but shut down and cases rise rapidly outside Asia.
Before the Fed news, focus had been on the main American political parties failing to agree on a quick jolt to the sinking economy with a $2 trillion stimulus. Morgan Stanley warned the epidemic could cause U.S. GDP to shrink a record 30% in the second quarter. Federal Reserve Bank of St. Louis President James Bullard said the country’s jobless rate may hit 30% and growth could even halve to $2.5 trillion during the three-month period.
Meanwhile, international air carriers continued to announce drastic measures to cope with the outbreak, with giants Emirates and Singapore Airlines Ltd. among the latest to slash flights, and jet maker Airbus SE withdrawing its earnings guidance.