US stocks notched their worst day of the year on Wednesday, as investors fretted about the new coronavirus variants, the slow pace of the vaccine rollout and obstacles to President Joe Biden’s promised $1.9tn stimulus package.
The S&P 500 index plummeted 2.6 per cent, its steepest drop since October, while the tech-heavy Nasdaq Composite also fell 2.6 per cent.
Investors moved out of risk assets despite assurances from Federal Reserve chairman Jay Powell that the US central bank would keep its ultra-easy monetary policy in place for the foreseeable future.
Mr Powell reiterated that the Fed would signal well in advance its intentions to adjust its $120bn-a-month asset purchase programme — a message also delivered by vice-chair Richard Claridaearlier this month.
“Tapering expectations are premature,” said Nic Hoogewijs, a bond fund manager at Lombard Odier. “These recent communications from the Fed have shown that a tightening of financial conditions is not what they want to see.”
On Wednesday fund managers instead clamoured into safe havens, including US government debt. The rally sent 10-year Treasury yields briefly below 1 per cent briefly for the first time since the Democratic party won control of the Senate. It later settled at 1.01 per cent.
The yield on the 10-year note climbed above this key threshold per cent on January 6, as Senate run-off elections gave Mr Biden’s party control of both houses of Congress — prompting investors to price in the prospects of a more generous fiscal aid package that would feed through to inflation, knocking the value of bonds.
But recent resistance from Republican lawmakers to Mr Biden’s stimulus package has since raised concerns that the potential size of the forthcoming aid will be underwhelming — upsetting reflationary bets.
In Europe, the Stoxx 600 benchmark index closed 1.2 per cent lower and the UK’s FTSE 100 fell 1.3 per cent, with the mood darkening as Britain moved to quarantine arrivals at its airports to safeguard against coronavirus variants. Meanwhile, news emerged that the supply of Covid-19 vaccines had run out in Spain’s Madrid region.
The dollar, often viewed as a haven asset, also strengthened against a basket of peers, climbing 0.5 per cent.
This month Mr Powell rebutted speculation that the Fed would rein in its asset-purchase programme. Mr Clarida has also said that the US central bank was unlikely to move on interest rates until inflation stayed at its 2 per cent target “for a year”.
Mr Powell reiterated that message on Wednesday, pledging to communicate the central bank’s plans well in advance of any adjustment to its policies.