US and European stocks slumped into correction territory on Thursday as selling pressure driven by the spreading coronavirus produced the worst week for markets since they were in the grip of economic crises.

The S&P 500 posted its poorest week since the depths of the financial crisis in October 2008, falling 2 per cent by lunchtime in New York and reaching a 10 per cent decline since a peak last week — marking what traders define as a correction.

The Stoxx 600 index of European shares dropped 3.4 per cent, leaving European markets set for their worst week since the eurozone sovereign debt crisis in 2011. London’s FTSE 100 fell 3.5 per cent.

“We’re in panic mode,” said Jim Paulsen, chief investment strategist of the Leuthold Group. “This isn’t just a temporary pull back where people are wondering whether to buy the dip, this is people not wanting to touch this.”

As share prices tumbled governments took some of their most aggressive steps yet to contain the outbreak.

Japan issued a de facto order for all schools to close for more than a month from Monday and Saudi Arabia halted the entry of Muslim pilgrims intending to visit the holy cities of Mecca and Medina.

On a visit to a Paris hospital where a 60-year old man died from the virus this week, Emmanuel Macron, French president, said: “We have a crisis before us. An epidemic is on its way.” In Iran the country’s vice-president for women’s affairs tested positive for coronavirus as did a second member of parliament.

In US debt markets, investors increased their bets on an imminent US interest-rate cut, pushing the yield on the three-month Treasury bill down 9 basis points to 1.41 per cent — lower than the Federal Reserve’s policy rate of 1.50-1.75 per cent. Fed rate setters are due to meet next on March 17-18.

The 10-year US Treasury yield touched a record intraday low of 1.2474 per cent as a rush into haven assets accelerated. Yields fall when prices rise. The Cboe Vix index that measures volatility in US stocks hit 32, its highest level since December 2018.

Tim Roth, chief investment officer for Wilmington Trust Investment Partners, said his group was reducing its exposure to stocks due to concern that quarantine efforts would weaken economic growth. “That’s the first time in the five and a half years I’ve been here that we’ve been underweight risk assets,” he said.

Goldman Sachs predicted US companies would “generate no earnings growth in 2020”, said David Kostin, US equity strategist. “We have updated our earnings model to incorporate the likelihood that the virus becomes widespread.”

Christine Lagarde, European Central Bank president, downplayed the chances of the ECB providing an imminent response to the coronavirus, telling the Financial Times the outbreak was not yet at a stage where it would require a monetary policy reaction.

Germany’s economics minister Peter Altmaier said the government was ready to provide subsidies and grants to help companies bridge short-term liquidity needs, but added there was no need for a stimulus to boost the economy.

Oil price falls deepened, with global benchmark Brent crude down 3 per cent at $51.88 a barrel, its lowest level since 2017.

Column chart of Stoxx Europe 600 weekly % change showing European stocks on course for their worst week since 2011

Investors have spent the week scrambling to price the likely economic impact of the virus, which has quickened its spread from Asia-Pacific across the world in recent days. The latest bout of market selling came after the US Centers for Disease Control and Prevention late on Wednesday confirmed a possible instance of community transmission of Covid-19 in California.

The CDC said it had confirmed the infection in a person who apparently had not travelled to China recently or been exposed to another known coronavirus patient. There are now a total of 15 confirmed cases in the US.

After US president Donald Trump said on Wednesday that Mike Pence, vice-president, would co-ordinate Washington’s response to the spread of the virus, Mr Pence appointed a senior health official under him to guide the work.

Coronavirus cases have spread to countries including South Korea and Italy and Mr Trump said other nations besides China might be “cut off” from US travel at some point. The World Health Organization said on Wednesday that new cases reported outside China had exceeded those within that country for the first time.

Haven assets rose again on Thursday, with gold adding 0.6 per cent to $1,650 per ounce.

“The price action since the weekend is a clear departure from the strikingly calm conditions of prior weeks,” said Tim Graf, a strategist at State Street. He said heightened risk and volatility due to the coronavirus “should keep the already-strong demand for safe haven assets in place”.

Mohamed El-Erian, chief economic adviser for Allianz, said: “What is urgently needed is a circuit breaker.” He added this would ideally include a medical development “that provides confidence that the spread of the virus worldwide is rapidly containable and highly reversible”.

Moves in Asian stock markets were more measured, although Japan’s Nikkei significantly underperformed as it fell 2.1 per cent.

Additional reporting by Martin Arnold in London

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