Bank of England stands ready to act to protect financial stability, No.10 says

Policymakers at the Bank of England in the UK have told the Prime Minister that they stand ready to act.

According to a spokesman for Number 10 cited by Reuters, Bank has made clear that it will take all steps necessary to protect financial and monetary stability

His remarks were made in response to a question regarding falls in the stockmarket, with the FTSE 100 off by 6.49% to 6,043.01 as of 1509 GMT.

Earlier, the Footsie had traded 7.3% lower, for its fifth biggest one-day decline since 1985.

Less than an hour before, a greater than 7% fall on the S&P 500 had triggered so-called 'Level 1 Market-Wide Circuit Breakers' on Wall Street, leading to a 15-minute halt in trading across all trading venues.

Against a backdrop of already heightened uncertainty around the near-term toll that the China coronavirus would exact on global growth in the very near-term, Saudi's decision at the weekend to slash its selling prices to Asia, Europe and the US by a record amount had led to a crash in crude oil futures.

That had in turn unleashed roughly 20% declines in the shares of blue-chips like BP and nearly 10% moves in some currency pairs, like those between the Russian Rouble and Mexican Peso against the Greenback, even as many of the world's main market indices were sporting near 7% declines.

"Although the likes of Warren Buffett will tell you that the time to buy is when others are fearful, it does not feel like that today. There may be better entry points into the market, even if there is a temporary rebound from here," said Commerzbank senior economist Peter Dixon.

To back up his arguments, Dixon highlighted how the S&P 500's valuation remained well above its long-term average using the so-called Cyclically Adjusted Price-to-Earnings measure, despite the recent correction in stock markets.

Between 1950 to 2019, the average reading on the CAPE was 19.6 times the S&P 500's trailing 10-year earnings, versus roughly 28 times as of 6 March.

The CAPE ratio had only risen past 30 on two occassions, in 1929 and between 1997-2001.

A fall back to a CAPE ratio of 24 would imply a drop in the S&P 500 to around 2,550 and for the FTSE 100 a 15% fall would see it trough in the second quarter at 5,500.

That would suffice to reduce UK gross domestic product by 0.3 percentage points in 2020 and 2021, with lower investment by companies on top of that pointing to "at least one negative quarter in Q2", Dixon said.

"How the authorities respond will be crucial. [...] Although the BoE reckons it can deliver the equivalent of 250 bps of monetary easing once we allow for a resumption of asset purchases, this is an overestimate in our view, particularly since the marginal effect of asset purchases diminishes with time.

"In any case, if the economy is suffering from a supply shock in the form of the corona virus, there is little that monetary policy can do. Accordingly, the budget scheduled for Wednesday (11 March) will be important to assess the extent to which the government is prepared to loosen fiscal policy after a decade of austerity. The extent to which the markets like or dislike the budget will be evident in GBP gyrations."