Asian stocks bounced, and bond yields rose from record lows on Tuesday on hopes that global policymakers would introduce co-ordinated stimulus to cushion the economic impact of a coronavirus outbreak.
US and European markets were expected to follow the Asian lead with major stock futures trading up more than 2 per cent .
Oil similarly clawed back some of its massive losses from Monday, rallying 7 per cent and offering hope that markets had found a floor, although sentiment was still fragile a day after prices plunged.
Yields on benchmark US 10-year Treasury debt more than doubled to 0.70 per cent as investors pared some of their heavy safe-haven holdings.
Supporting the mood was a pledge from President Donald Trump on Monday to take "major" steps to protect the economy and float the idea of a payroll tax cut with congressional Republicans.
"Talk of coordinated fiscal and monetary support is getting louder," said Rodrigo Catril, a senior FX strategist at National Australia Bank.
US stock futures, the S&P 500 e-minis, were up 3.43 per cent at 2,842.
In early European trades, the pan-region Euro Stoxx 50 futures were up 2.72 per cent at 3,056, German DAX futures were up 2.41 per cent at 10,943.5, FTSE futures were up 3.14 per cent at 6,178.5.
The gains in the US and European futures come on the back of a 1.36 per cent rise in MSCI's broadest index of Asia-Pacific shares outside Japan, having dropped more than 5 per cent on Monday.
Despite the bounce, analysts warned it was too early to call a trough in equity markets.
"In fact, very high volatility in equities will persist in the coming weeks as the viral outbreak accelerates outside of China and policy makers race to find a concerted response to get ahead of the curve in markets," Michael Strobaek, global chief investment officer at Credit Suisse, wrote in a research note.
Japan's Nikkei ended the day up 0.85 per cent, after touching its lowest level since April 2017 earlier in the day. Japan will unveil a second stimulus package later on Tuesday to offset the impact of the outbreak.
Australia closed up 3.1 per cent as some went hunting for bargains in beaten down stocks.
China’s benchmark Shanghai Composite Index was trading up 1.7 per cent as new domestic coronavirus cases tumbled and President Xi Jinping’s visit to the epicentre of the epidemic lifted sentiment.
Headlines on the coronavirus, however, were still no brighter with Italy ordering everyone across the country not to move around other than for work and emergencies, while banning all public gatherings. "Although uncertainty is very high, we now expect similar restrictions will be put in place across Europe in the coming weeks," warned economists at JPMorgan.
“We are now expecting a rolling 1H20 global growth contraction and a powerful global disinflationary wave to take hold,” they added. “We expect the Fed to cut to zero at or before its March 18th meeting.”
Benchmarks Brent crude futures and US West Texas Intermediate (WTI) crude bounced back after having recorded their biggest one-day percentage declines since January 1991 on Monday.
Gold prices fell 1 per cent, retreating from the last session’s jump above the key $1,700 level, as safe-haven demand waned a little amid speculation of global stimulation measures.
Onus on central banks
Such has been the conflagration of market wealth that analysts assumed policy makers would have to react aggressively to prevent a self-fulfilling economic crisis.
The US Federal Reserve on Monday sharply stepped up the size of its fund injections into markets to head off stress.
Having delivered an emergency rate cut only last week, investors are fully pricing an easing of at least 75 basis points at the next Fed meeting on March 18th, while a cut to near zero was now seen as likely by April.
Britain’s finance minister is due to deliver his annual budget on Wednesday and there is much talk of coordinated stimulus with the Bank of England.
The European Central Bank meets on Thursday and will be under intense pressure to act, even though rates there are already deeply negative.
"Italy's decision to quarantine the whole country will affect 15 per cent of Europe's GDP, putting the ECB at the forefront of efforts to cushion the escalating economic deterioration," said Brian Martin, a senior international economist at ANZ.
Bonds had charged ahead of the central banks to essentially price in a global recession of unknown length.
Yields on 10-year US Treasuries reached as low as 0.318 per cent on Monday - a level unthinkable just a week ago - but rose back to be last at 0.6818 per cent on Tuesday amid the stimulus chatter.
That in turn helped the dollar recoup some of its recent hefty losses to reach 104.70 yen, edging away from Monday’s three-year trough around 101.17.
The euro eased back to $1.1351, after climbing 1.4 per cent on Monday to the highest in over 13 months at $1.1492. – Reuters