Stocks drop and government bonds rally on bleak GDP data

Global stock markets dropped on Thursday after figures laid bare the enormous damage suffered by the US and German economies as coronavirus brought activity to a standstill in spring.

The US recorded its largest contraction in postwar history with GDP shrinking at an annualised rate of 32.9 per cent in the second quarter, or 9.5 per cent quarter on quarter.

The fall was slightly narrower than expected but US stocks slid at the open, and the benchmark S&P 500 was down 1.5 per cent in morning trading, with Nasdaq giving up 1 per cent.

The important question for investors is how quickly the economy can recover, said Ambrose Crofton of JPMorgan Asset Management. "While we believe the worst is certainly behind us we think the path ahead will be bumpy as the economy battles to reopen without leading to a reacceleration in infections," he said.

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Futures had extended their declines before the opening bell after Donald Trump floated the idea of delaying this year's presidential election. "It will be a great embarrassment to the USA. Delay the Election until people can properly, securely and safely vote???" the president wrote on Twitter.

European markets had tumbled earlier in the session after data showed Germany’s economy contracted even more than expected at the peak of the coronavirus outbreak in Europe.

Germany’s Dax was the worst performer of the major indices, dropping 3.1 per cent to a five-week low. The nation’s economy shrank 10.1 per cent in the second quarter from the first as business investment, exports and consumer spending collapsed.

Global bond markets rallied on Thursday as the stock drop sent investors looking for safe assets.

Gains for highly rated government debt pulled UK 10-year borrowing costs to an all-time low of 0.07 per cent. The US 10-year yield fell to 0.54 per cent, the lowest since the record trough reached in March’s market chaos.

Alexis Gray, senior investment strategist at Vanguard, said that while some European data such as German business sentiment were hinting at a recovery in the bloc's major economies, "the gains are going to get harder from here. The recovery will be slower and more grinding as consumers remain reticent to be out with others in close, confined spaces."

Concern also spread to other European markets, with France’s CAC 40 falling 1.9 per cent, the UK’s FTSE 100 dropping 2.3 per cent and the European Stoxx 600 declining 2 per cent.

European equities were also hit by a run of downbeat corporate earnings, after Volkswagen cut its final dividend by more than a third and the UK’s Lloyds Banking Group put aside a further £2.4 billion to deal with expected customer defaults and said the lockdown had hit the economy much more than it had expected.

A continuing stalemate between the White House and Congress over new stimulus measures to prop up the struggling US economy, as Washington heads into its summer recess, was also a major concern. "The next few days are going to be very worrying for the markets," Ms Stupnytska said.

Gold, which has rallied to all-time highs in recent sessions, fell 0.8 per cent to $1,955 per troy ounce. The precious metal frequently serves as a haven in times of uncertainty.

The US dollar slipped, sending the pound above $1.30 for the first extended period since March’s market turmoil.

"Stocks opening lower, bond yields keep falling, dollar and gold falling. I'm sure this all makes sense somehow," said Kathy Jones, strategist at Charles Schwab.

Brent crude, the international oil benchmark, fell 1.8 per cent to $42.95 a barrel.

- The Financial Times Limited