Global equity markets were mixed last week as the coronavirus spread beyond China
Central bank stimulus, including an emergency rate cut from the US Fed, failed to support markets.
- Global markets continued to see massive moves last week amid mounting fears that the spread of the coronavirus outside China could result in a global pandemic, threatening to severely disrupt supply chains and bring globalisation to an end.
- The confirmed number of cases surpassed 100,000 and although more than 55,000 patients have recovered there have been about 3,400 deaths. Most fatalities have occurred in mainland China, but countries such as Italy, Iran and South Korea have witnessed an increasing death toll.
- The Vix Index, a widely used measure of stock market volatility, experienced its biggest five-day spike since the bankruptcy of Lehman Brothers in 2008 as stretched valuations clashed with a realisation that a pandemic could tip the global economy into recession.
- The intensity of the latest rout demonstrated an emerging trend where volatility disappears for long stretches but then aggressively resurfaces, rattled by violent shocks. Some argue that ‘option writing’, which has become a popular alternative to using expensive core government bonds for portfolio protection, has been a major contributor to the severity of the recent correction, while others have criticised algorithmic strategies such as volatility targeting for exasperating the recent falls.
- It was unsurprising that investors remained firmly in risk-off mode and continued to seek the safety of havens such as core government bonds, prompting yields to fall even lower and in many cases to reach all-time lows. The yield on the benchmark US 10-year Treasury fell to 0.60% while the UK 10-year Gilt fell to 0.27%. Gold, another haven asset, climbed to $1,667 an ounce and kept close to its 7-year high.
- Despite good intentions, the latest monetary stimulus measures from central banks did little to soothe markets as reality took hold; investors questioned whether lower interest rates would have any real impact on supporting the global economy when production is unlikely to increase if firms are unable to source inputs from countries affected by the virus.
- In terms of sectors, airlines were among the hardest hit, and a slump in passenger numbers was the last straw for the UK’s Flybe, which collapsed, while other airlines all flagged up warnings.
- Consumer goods stocks have been one of the few sectors to benefit from the coronavirus outbreak, buoyed by panic-buying.
- Healthcare stocks were also strong after the prospects for Bernie Sanders’ “Medicare for All’ system diminished following former Vice President Joe Biden’s solid performance in the race to become the Democratic Party’s candidate at November’s presidential election.
- Finally, oil prices plummeted after Opec’s talks with Russia collapsed, sparking fears that Saudi Arabia would scrap production limits altogether, intensifying concerns over already softer demand.
- Global growth estimates were revised lower on concerns that the latest downturn could be prolonged due to a combination of both supply and demand shocks.
- The OECD lowered its 2020 global growth estimate to 2.4%, and warned that if the coronavirus spreads throughout Asia, Europe and North America, growth could slow to 1.5%.
- The IMF announced that it was setting aside a fund of $50bn in emergency financing for countries stricken by the coronavirus, given the expectation that global economic growth would be dented.
- Central banks around the world were quick to provide supportive measures with the US Fed cutting rates by 0.5% to 1% - 1.25%, outside of an FMOC meeting; this prompted central banks in Canada, Australia and some emerging market countries to follow suit.
- The ECB was more cautious, while Mark Carney, Bank of England governor, suggested different countries would take a domestically tailored approach rather than the co-ordinated action seen during the 2008 financial crisis.
- Reduced activity in China started to feed through to its economic data as the Caixin service sector PMI fell to 26.5 from 51.8, similar to the official index reading of 29.6. Not only was it the worst on record, but it was the first time since the survey began in 2005 that it was below 50. Chinese new orders also fell to their lowest level since the financial crisis, but outstanding orders surged to a record high as existing orders have not yet been completed.
- The latest US data releases provided little confirmation of a slowdown as the ISM’s services PMI stayed firmly in expansionary territory, registering 57.3 versus 55.5 in January, while construction data was also particularly strong. The February jobs report surprised on the upside as 273,000 jobs were added during the month while the US unemployment rate returned to a 50-year low.
The Week Ahead
|Tuesday||Europe GDP; China CPI |
|Wednesday||US CPI; UK industrial production|
|Thursday||ECB deposit rate; Europe industrial production|
|FTSE All Share
|Dow Jones Industrial
|FTSE Eurofirst 300
|MSCI Asia ex Jap $
|MSCI EM $
|MSCI World $
|UK Gov 10 yr
|US Gov 10 yr
|German Gov 10 yr
|Japan Gov 10 yr
|Brent Crude ($/bbl)
|$ per £
|€ per £
|¥ per $
Source: FE Analytics, Financial Times, JP Morgan Asset Management
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