European market suffer worst-ever plunge

Europe’s markets got little solace from the ECB moves to protect the economy, with stocks dropping a worst-ever 11.5 per cent.

Markets found little solace from the European Central Bank’s moves to protect the economy from the impact of the coronavirus outbreak, with European stocks dropping a worst-ever 11.5% on Thursday, adding to worries the selloff is creating paralysis in the global financial system.

Governments and central banks have scrambled to calm markets and keep companies and banks functioning as the pandemic worsens. The ECB on Thursday rolled out cheap loans for banks at an interest rate as low as minus 0.75% and stepped-up bond purchases, including those of private companies.

ECB President Christine Lagarde said the central bank wouldn’t act to support Southern European government bonds if they come under pressure.

“We are not here to close spreads. There are other tools and other actors to deal with these issues,” Ms. Lagarde said. Her comments indicate that she might have less appetite for government bond purchases compared with her predecessor, Mario Draghi, said Andreas Steno Larsen, global foreign exchange and fixed-income strategist at Nordea Markets.

Investors had been expecting the ECB to cut its key rate following cuts from the Federal Reserve and other central banks in recent days.

“It’s brutal,’’ said Sebastien Galy, a senior macro strategist at Nordea Asset Management. “If you don’t get a more negative interest rate by the ECB, by definition it’s a disappointment” for some investors, he said.

Ms. Lagarde’s comments resounded through financial markets.

“The ECB delivered quite a lot…but the press conference didn’t go very well,” said David Riley, chief investment strategist at BlueBay Asset Management. “That comment about not being here to close bond spreads was very ill-advised.”

In a sign of the dramatic market reaction to the ECB package, yields on Italian government bonds soared to 1.74% from 1.22%, the biggest daily move in almost five years. Italy, at the center of the coronavirus crisis in Europe, has some of the region’s weakest banks, seen as most in need of help given the downturn in the economy. Meanwhile, the euro slid more than 1% against the dollar.

National stock indexes in France, Germany and Italy were all down around 10%. Shares in European banks took the brunt of the selling, with the Stoxx Europe Banks Index down close to 14% for the day, taking its loss for the year so far to about 38%.

Barclays PLC was among the worst performers among Europe’s lenders, down 16% for the day, for a year-to-date decline of close to 45%. Swiss lender Credit Suisse Group AG was also down 16%, off almost 44% for the year. UBS Group AG shares fell 13%.

French banks with large oil sector exposures were down by double digits, with BNP Paribas SA off 13% and Natixis SA losing 22%. ING Groep NV, also heavily exposed to energy companies, slumped more than 20%.

Deutsche Bank, considered one of Europe’s most-troubled lenders, fell 18%. A Deutsche Bank “bail-in bond,” which is meant to help shore up the bank’s capital base if it suffers major losses, dropped in value from 98 cents on the euro at the start of the week to 78 cents Thursday. That is still above where it traded when the bank had a financial scare in 2016.

Investors are increasingly concerned banks could deplete their capital with large loan provisions from the first quarter onward, as borrowers including airlines, oil companies and retailers are sent into a tailspin from virus-containment measures.

Banks with exposure to transport, retailers and energy have been among the hardest hit since the stock market rout quickened on Monday, and many analysts say central banks and governments will have to do far more to stabilize the sector.

Despite the negative market reaction on Thursday, the steps taken by the ECB were significant, analysts said. These include allowing banks to temporarily lower capital and liquidity levels below current requirements. Such moves would have been unthinkable just a couple of weeks ago for a regulator that has repeatedly told lenders to raise those levels in reaction to the last financial crisis.

The aim of the ECB’s cutting the rates at which the central bank will lend to commercial banks through its long-term refinancing operations is to create two separate interest rates in the eurozone and effectively stimulate lending while not discouraging depositors.

“This should make loans cheaper without affecting savers’ income,” said Eric Lonergan, macro fund manager at M&G Investments. “Once the market digests this they will understand that far from monetary policy being exhausted, it is way more powerful.”

Longer term, the policy should help lessen risks for European banks and even boost earnings by allowing them to keep lending while not cutting further into their profitability, Mr. Lonergan said.

Other analysts thought the ECB could have done more to directly help smaller companies that would be most under strain. “I would have expected something more targeted directly to small and medium sized companies,” said Nikolaos Panigirtzoglou, global markets strategist at JPMorgan Chase & Co. “It is relatively easy for the ECB to help banks but I am more worried about nonfinancial companies.”

—Anna Hirtenstein and Caitlin Ostroff contributed to this article.

The Wall Steet Journal