The Bank of England has vowed to help stabilise financial markets, joining other central banks in promising action to ease the economic impact of the coronavirus.
London’s FTSE 100 index soared almost 3% in early trading, before falling back into negative territory.
It followed a rebound in Asian markets amid hopes central banks will cut interest rates and provide stimulus.
On Monday, Japan’s central bank said it was prepared to intervene.
This mirrored a similar pledge from the US Federal Reserve on Friday to stop more big falls on global stock markets.
And the Bank of England said it continued to monitor developments and is assessing its potential impacts on the global and UK economies and financial systems.
“The Bank is working closely with HM Treasury and the FCA (Financial Conduct Authority) – as well as our international partners – to ensure all necessary steps are taken to protect financial and monetary stability,” a spokesman said.
Last week saw major stock markets suffer their worst weekly performance since the 2008 Global Financial Crisis. But investors are now hoping that central banks around the world will now work in unison to support financial markets as the coronavirus outbreak spreads.
In a statement, the Bank of Japan said: “The BoJ will monitor developments carefully, and strive to stabilise markets and offer sufficient liquidity via market operations and asset purchases.”
In a rare emergency statement, BoJ governor Haruhiko Kuroda said the central bank would take necessary steps to stabilise financial markets: “Overseas and domestic financial markets continue to make unstable movements due to heightening uncertainty over the impact on the economy from the spread of the coronavirus.”
Asian markets reacted positively to the BoJ move on Monday with China’s Shanghai Composite index up 3.2%, while Japan’s benchmark index, the Nikkei 225, ended the day 1% higher.
Last week concerns about the outbreak wiped more than $5 trillion from global stocks.
On Monday the privately-run Caixin/Markit Manufacturing Purchasing Managers’ Index showed the fastest rate of contraction in China’s factory activity since the survey was launched in 2004. That followed the release on Saturday of equally weak official numbers.
Both sets of data come after employers across the country were ordered to remain closed after the annual Chinese New Year holiday as part of attempts by authorities to stem the spread of the virus.
The falls, which were even worse than the slump seen during the 2008 global financial crisis, highlighted the outbreak’s huge impact on the world’s second-largest economy.
There are limits to what traditional monetary policy can actually achieve if the coronavirus outbreak continues to spread.
If supply chains are disrupted, and factories have to shut down, interest rate cuts are unlikely to help very much. Likewise, if people don’t want to go to the shops, eat in restaurants, travel on planes or stay in hotels, cheap credit isn’t going to make a lot of difference. And in many countries, interest rates are in any case already low.
But the prospect of a rate cut does at least provide a psychological prop – and reduces the risk of the falls on the markets turning into a rout.
The next step may be to look at ways of encouraging commercial banks to provide targeted support – for companies that are struggling with repayments on loans because their business has been affected by the outbreak, for example.
That may be the kind of life-support that’s really needed to keep firms operating until the worst of the crisis is over.
Over the weekend senior officials in President Donald Trump’s administration also tried to soothe concerns about the impact of the outbreak, highlighting the US economy’s underlying strength.
US Vice-President Mike Pence, who is leading the administration’s response to the coronavirus, said that the stock market “will come back”, adding that “the fundamentals of this economy are strong”.
The fall in global stocks last week was similar in size to the biggest ever one-day fall in October 1987, which became known as Black Monday.
Stephen Clapham, the founder of Behind the Balance Sheet, was working in the City in 1987. “Somebody described this as carnage. This is not carnage, 1987 was carnage,” he told the BBC Radio 4’s Today Programme this morning.