US and European equities slid on Wednesday as coronavirus cases soared across both regions.
The US benchmark S&P 500 fell 3.5 per cent, its biggest one-day loss since June, putting the index on course for its worst weekly performance since the market ructions in March. More than 95 per cent of the stocks that make up the index declined. The tech-heavy Nasdaq Composite dropped 3.7 per cent.
Europe’s Stoxx 600 closed down 3 per cent, leaving it nearly 6 per cent below its level at the end of last week and at its lowest since May. German and Italian markets were among the worst hit across the region, each falling more than 4 per cent, while London’s FTSE 100 declined 2.8 per cent.
Wednesday’s selling, which ricocheted into the commodities market, was prompted by an increase in infections globally as well as the lingering disappointment in the US after lawmakers in Washington failed to strike a deal on stimulus, said BlackRock portfolio manager Russ Koesterich.
“If people aren’t mobile because restrictions have been put in place or they decide to stay home more, that will impact economic activity,” he said. “And that point is important . . . people nervous of catching Covid are less likely to go out for dinner and get on a plane.”
Alexis Gray, investment strategist at Vanguard, said it had become clear that restrictions imposed in Europe to quash another outbreak of the virus had been insufficient, meaning stricter curbs were likely. As a result, “the economic outlook has dimmed”, she said.
“We’re facing unprecedented uncertainty, and that’s what the market is struggling with.”
Germany on Wednesday agreed further restrictions to slow the second wave of the pandemic, and French president Emmanuel Macron addressed his nation to announce more lockdown measures there.
In the UK, officials reported more than 300 coronavirus deaths on Wednesday for the second day in a row, while the seven-day average of coronavirus cases in the US exceeded 70,000 for the first time on Tuesday.
John Roe, head of multi-asset funds at Legal & General Investment Management, said US investors should consider whether they were being “complacent” about the measures the government might need to follow Europe in taking.
Shares of airlines, cruise operators, hotels, restaurants and casino chains all fell on Wednesday. Pete Santoro, a portfolio manager with Columbia Threadneedle, said that investors would need to question whether the companies hardest hit by the coronavirus would “be able to survive a longer lockdown if we go into one”.
The sell-off also hit high-yield and investment grade corporate bonds, with popular exchange traded funds that track the asset class falling in value. Yields on junk debt, including bonds issued from some of the riskiest borrowers, climbed on Monday and Tuesday. Data from trading platform MarketAxess suggested that trend would continue on Wednesday, as the number of corporate bonds dropping in value far outstripped debt that was being bid higher.
Traders said they were fielding calls from investors who, watching the equity sell-off, were caught off guard by the fact that yields on 10-year Treasuries were relatively unchanged at 0.77 per cent. The two often move in opposite directions, with Treasuries providing some cushion for a drop in stocks.
“With yields at 75 basis points, you are not getting as much protection with bonds,” Mr Koesterich said. “There’s a limit to how much lower bond yields will fall.”
In the US, energy stocks tracked the price of oil lower and were among the market’s biggest fallers. Brent crude, the international benchmark, settled down 5 per cent at $39.12 a barrel — its lowest level since June — on the prospect of weakening fuel demand in a coronavirus-constrained economy.
Traders increasingly believe Opec and its allies will need to delay plans to add back oil production in January. The recovery in fuel consumption since April appears to have stalled and may be reversing, with US fuel inventories rising.
Stephen Brennock at oil brokerage PVM said $40 a barrel was a “red line” for Opec, but the cartel was having to deal with rising supplies from Libya where the end of a fuel blockade had led to its rapid resumption of output.
Analysts said next week’s US election was expected to be a source of further tumult in equities markets because of fears of a contested election. The Vix index, a measure of expected volatility over the next month, traded at 40.7, well above its long-term average of 20 and at its highest point since June.
But the US dollar remained a haven asset, rallying 0.5 per cent against a basket of six leading currencies.
Additional reporting by David Sheppard in London