WASHINGTON/LONDON (Reuters) – European and U.S. stocks climbed on Thursday, recovering from earlier losses, in a sign of tentatively more stable markets, as central banks across the world moved to stem a coronavirus-induced financial rout in moves that boosted bonds and provide more access to the dollar.
The U.S. Federal Reserve opened the taps for central banks in nine countries to increase the availability of dollars for contracts made in the U.S. currency in hopes of loosening particularly tight bond markets.
The Fed said the swaps, in which the U.S. central bank accepts other currencies as collateral in exchange for dollars, will be in place for at least the next six months.
The swaps will allow the central banks of Australia, Brazil, South Korea, Mexico, Singapore, Sweden, Denmark, Norway and New Zealand to tap a combined total of up to $450 billion to help ensure the world’s dollar-dependent financial system functions.
The collateral to purchase crude oil, for example, is U.S. Treasury debt and to buy those securities requires dollars, said Michael Skordeles, U.S. macro strategist at Truist/Suntrust Advisory Services in Atlanta.
“All these things kind of happening at once causes a lot of dominoes to fall, and as the dominoes fall, it creates more demand, pushing people toward the dollar,” Skordeles said.
“This (the dollar swap lines) is going to help, but it’s not a silver bullet,” he said. “Because there’s a flow of capital into dollar-denominated assets, in particular U.S. Treasuries, it’s starving these countries of liquidity and making the dollar appreciate.”
The Mexican peso MXN=has slumped about 30% against the dollar since a month ago, when Wall Street began to slide by about the same amount on pandemic fears.
On Wall Street, the Dow Jones Industrial Average .DJI rose 383.61 points, or 1.93%, to 20,282.53, the S&P 500 .SPX gained 34.05 points, or 1.42%, to 2,432.15 and the Nasdaq Composite .IXIC added 229.81 points, or 3.29%, to 7,219.66.
MSCI’s world equity index .MIWD00000PUS gained 0.09%.
The stock market meltdown, triggered by worries over the coronavirus outbreak, has pushed Wall Street’s three main indexes down about 30% from their record closing highs last month and has almost erased the Dow Industrials’ .DJI gains since U.S. President Donald Trump’s 2017 inauguration.
The dollar rose against a basket of six major currencies, striking a more than three-year high .DXY, as investors rushed to secure liquidity.
The British pound GBP=D3 climbed, reversing after slipping past the previous day’s trough to the lowest since 1985.
Bond markets stabilized somewhat after the European Central Bank pledged late Wednesday to buy 750 billion euros ($820 billion) in sovereign debt through 2020.
That brought the ECB’s planned purchases for this year to 1.1 trillion euro, with the new purchases alone worth 6% of the euro zone’s GDP.
Government bond yields in Italy and across the euro zone dropped after the ECB’s emergency measures, though European stocks fell back into negative territory after arresting their rout in early trading.
FILE PHOTO: Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., March 19, 2020. REUTERS/Lucas Jackson
Expected price swings for some of the world’s biggest currencies rocketed to multi-year highs as the demand for dollars forced traders to dump currencies across the board.
For the British pound versus the dollar, expected volatility gauges leapt to 24.4%, their highest level since before the 2016 Brexit vote.
“One unresolved and really critical issue is what’s going on in volatility,” said Andrew Sheets, chief cross-asset strategist at Morgan Stanley. “I think that volatility needs to stabilize before the broader market can heal.”
(Graphic: Equities and bonds total return, here)
ITALIAN YIELDS FALL
Italy, which has seen its borrowing costs jump in recent days, led the drop in yields after the ECB move.
Its two-year bond yields slumped by than 100 basis points to 0.41% IT2YT=RR, heading for their biggest one-day fall since 1996. Italy’s 10-year bond yields slid as much as 90 bps to 1.40% IT10YT=RR.
The gap over the safer German Bund’s yields tightened almost 100 bps from Wednesday’s closing levels and were set for the biggest daily drop since the 2011 euro one crisis.
Markets elsewhere failed to respond to central bank action.
Before the ECB move, the U.S. Federal Reserve promised a liquidity facility for money market mutual funds and the Bank of Japan made two unscheduled bond purchases totaling 1.3 trillion yen ($12 billion).
The Australian central bank slashed interest rates to a record low of 0.25%.
Traders reported huge strains in bond markets, however, as distressed funds sold any liquid asset to cover losses in stocks and redemptions from investors.
Benchmark 10-year sovereign bond yields in New Zealand, Malaysia, Korea, Singapore and Thailand surged as prices fell, and U.S. 10 year Treasuries US10YT=RR rose 10 basis points through the session.
The coronavirus pandemic has killed almost 9,000 people globally, infected more than 218,000 and prompted widespread emergency lockdowns.
Gold XAU=dropped 0.31%, and like other assets was buffeted by volatility. Copper hit its down-limit in Shanghai, and benchmark futures traded in London CMCU3 fell to their weakest in over four years.
Oil jumped after an overnight plunge to an 18-year low in Asian trade, though coronavirus fears capped gains. Brent LCOc1 surged nearly 8% to $26.82.
(Graphic: Emerging market currencies sink, here)
Reporting by Tom Wilson in London and Chris Prentice in Washington; Additional reporting by Herb Lash in New York, Tom Westbrook in Singapore and Sujata Rao in London; Editing by Nick Zieminski and Bernadette Baum