StockBeat: Markets Rise in Hope of Rescue by Policymakers

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By Geoffrey Smith — Europe’s stock markets leaped on Tuesday, in a relief rally inspired by the prospect of coordinated policy stimulus to support the world economy in the face of a coronavirus outbreak that continues to spread rapidly across the globe.

By 5:25 AM ET (1025 GMT), the benchmark index was up 10.4 points or 2.8% at 386.46, still down over 10% from the all-time high it reached only two weeks ago. In Italy, the European country worst hit by the epidemic so far, the rebounded 2.4%, while the trade-sensitive German rose 2.8%. The U.K. lagged with a rise of 2.3%, held back by gains in on the foreign exchange markets.

Gains were broad-based across all sectors, with some of the most oversold rebounding most. Airlines Deutsche Lufthansa (DE:) and IAG (LON:) shares rose 8.4% and 7.4% respectively, while wind turbine maker Vestas Wind Systems (CSE:) shares rose 4.4% and miner Anglo American (LON:) shares rose 4.2%. However, defensive stocks also did well, with Nestle (SIX:) stock rising 3.4% and supermarket chain J Sainsbury (LON:) rising 3.9%.

Among the few companies to report on Tuesday, Nivea maker Beiersdorf (DE:) underperformed after saying it was impossible to predict the impact of the Covid-19 outbreak on this year’s sales, while U.K. restaurant chain Greggs PLC (LON:) outperformed after delivering fourth-quarter results above expectations and promising another strong year ahead. Greggs shares rose 4.7%.

The day was dominated by the scheduling of a conference call at 7 AM ET (1200) between the finance ministers and central banks of the G7 industrialized countries.

Hopes were initially high that the call would result in the announcement of concrete and coordinated measures to address the economic impact of the virus. They were, however, disappointed by a Reuters report which said no such measures were contained in the draft communique that had been prepared in advance of the call.

Those expecting rescue from the world’s central banks took heart from Interest rate cuts during the Asian session from both Australia and Malaysia, while another Reuters report said the European Central Bank was working on a new refinancing operation to guarantee liquidity for small- and medium-sized enterprises hit by the virus.

That report was consistent with ECB President Christine Lagarde’s statement on Monday promising “appropriate and targeted measures” but contrasted with more ambitious market expectations of a further interest rate cut or additional bond purchases. The ECB is reluctant to cut rates further, fearful of the impact on banking profitability and consequently the stability of the euro zone’s financial system. In addition, public opinion in Germany and elsewhere remains opposed to more aggressive quantitative easing.

For some, though, it’s too early to sound the all-clear.

Luc Filip, head of discretionary portfolio management at SYZ Private Banking, said in e-mailed comments that last week’s declines are “only a first leg drop that might suggest a bigger one to come. We find it hard to believe the situation will get better quickly, especially with the threat of quarantines reaching Europe and the U.S.”

Filip voiced concern that it was difficult to estimate the damage to the Chinese economy in particular. “For investors wanting to reduce portfolio correlation to China, we would suggest exiting industrials – especially auto-related stocks – semi-conductors, oil companies and place some of the proceeds in healthcare, technology – excluding semis – and staples.”

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