With good news seemingly in short supply, the week’s market movements were once again dominated by news of the spread of COVID-19. As central banks and governments around the world attempted to pull more rabbits out of their collective hats, with rate cuts, fresh fiscal stimulus and even daily television appearances announced; little could be done to stop the almost relentless selling that has engulfed markets for the last month or so.
Markets started the week on the worst possible footing as an emergency 1% rate cut in the US, which aimed to soothe markets, did exactly the opposite. On Monday morning the US Federal Reserve moved to conduct its second emergency rate cut in a week, moving the cost of borrowing to near zero, along with the introduction of $700 billion stimulus package. The move even cheered Donald Trump, a long-term critic of the central bank, who said the action “makes me very happy”. It seemed he might have been the only one, however.
Volatility gauges, also dubbed fear indices spiked with America’s soaring 44% to a record close as stocks plunged further into bear territory. Investors fretted that the Fed may have done all it can do, with its actions still insufficient to help many companies facing sharp declines in demand the longer the virus spreads. Some $2.69 trillion in market value was wiped from the S&P 500 as it suffered its third-largest decline in history, having to apply circuit breakers to stop frenzied selling at its open. As the dust settled on a tumultuous Monday, all three major US indices had fallen over 10% with the S&P 500 and NASDAQ nursing 12% losses and the Dow Jones losing almost 13% on the day. The story was the same across the world with MSCI’s global index shedding 9.14%.
It seems nothing was safe from the selling, not even traditional safe havens such as precious metals. Platinum dived nearly 27% to its weakest level since 2002, while gold fell more than 5% as investors clambered for cash. The real winner was the bond market, especially US Treasuries, which continued to yield near record lows.
The picture was much the same for the remainder of the week, as Thursday saw The Bank of England cut interest rates to 0.1%, its second emergency rate cut in just over a week, and promised £200 billion of bond purchases in a fresh attempt to shield the domestic economy from the coronavirus outbreak. Number 11 also tried to aid small businesses and the consume, unveiling a package of financial measures including £330bn of loans and £20bn in other aid. The Chancellor also announced a business rates holiday for retailers and pubs. Lenders will also offer a 3 month mortgage holiday to homeowners who run into financial difficulty.
The week ahead
Although it is a fair assumption that markets should ebb and flow with news of the COVID-19 outbreak, the raft of economic data that is set to be released this week should help us understand just how much damage the virus has done to the global economy.
With news that the death toll in Italy has now gone beyond China’s, it seems that Europe is quickly becoming the epicentre of the outbreak. With this in mind, Monday’s European Consumer Confidence numbers, released by Eurostat, should show a considerable shift downwards. With lockdowns becoming standard practice across various European states, it is hard to see how consumers, who are trapped in their homes, can spend, effecting business spending and employment, therefore confidence. Compounding the issue is the fact that previous readings during the last year at least have been very poor.
Dented consumer confidence numbers should act a precursor to PMI numbers released across Europe and the UK on Tuesday. PMI numbers are a useful part of the economist’s toolkit as they act as a leading indicator of economic health - businesses react quickly to market conditions, and their purchasing managers perhaps hold the most current and relevant insight into the company's view of the economy. Interestingly, the two largest economies in the Eurozone, Germany and France release data for both their Manufacturing and Services sectors an hour before the UK does.
Staying in the UK, with the Bank of England having taken unprecedented steps to lower rates to 0.1%, Wednesday’s inflation statistics should make for fascinating reading. Although recent rates cuts may not have fed into the numbers yet, it will be interesting to see if prices had stayed around the central bank’s target of 2%.
The information in this blog or any response to comments should not be regarded as financial advice. If you are unsure of any of the terminology used you should seek financial advice. Remember that the value of investments can go down as well as up, and could be worth less than what was paid in. The information is based on our understanding in March 2020.