Governments from Iran to Australia battled to keep the COVID-19 (Coronavirus) from spreading further this week, shutting schools, cancelling events and stocking up on medical supplies as markets jolted lower with each new case revealed. For the first time new infections reported around the world surpassed those in mainland China, where the disease first surfaced two months ago. Throughout the week, as the number of confirmed cases of the virus rose, global markets headed sharply in the opposite direction. It seems now, hopes that the epidemic that started in China would be over in a few weeks and economic activity would return to normal have been shattered, as new infections around the world increased on an almost hourly basis.
Monday brought news that the death toll in Italy had climbed to seven, while several middle eastern countries were forced to deal with their first cases. Fears that the virus could now cause similar disruptions to those experienced in China elsewhere put markets in a tailspin with Wall Street’s fear gauge, the CBOE Volatility Index (VIX), jumping to two-year highs. All major US indices lost around 3.5%, with Japan’s Nikkei down 4% and the Milan stock market enduring losses over 5% to kick the week off. Investor fears were palpable, with the heavy losses endured during the start of the week being only the beginning.
Stocks across the globe, coupled with oil prices, continued to tumble throughout the week. The speed and ferocity of the sell-off has been intense; this week’s falls are set to be the largest pull back in equity markets since the Global Financial Crisis. Thursday saw the S&P 500 fall over 4%, with the two largest stocks on the index, Apple and Microsoft, both falling over 6%.
While risk assets fell across the board, safe-haven holdings helped to offset some of the losses, highlighting that diversification is key in portfolio construction. US Treasury yields hit all-time lows and gold hit a seven-year high at the start of the week.
Policy response will be interesting to see, and this may provide support to markets, with the US bond market now pricing in three interest rate cuts in 2020, and there is an increased chance the UK will also cut interest rates. Hong Kong has already gone one step further; this week they injected HK$10,000 ($1,200) into the bank accounts of every permanent resident aged 18 or over. The targeted response of putting money directly in the hands of consumers could lead to increased demand and spending and support companies in the short term.
In China there have been a handful of positive developments this week which may show the virus has peaked in the country. New cases on Friday were at the lowest level since 24 January, while people have been returning to work as factories and plants have begun to come online again. Starbucks in China, which had closed its coffee shops, has also subsequently re-opened 85% of its stores.
While the market reaction has been severe and certainly painful for investors and clients, history has shown that epidemics have historically provided good buying opportunities for investors with a medium-long term time horizon. The potential for a sharp rebound in markets shouldn’t be discounted, which would be detrimental for investors that decided to sell down their investments to cash during the market turbulence.
In an admittedly disastrous week for markets, there were some positives to hold on to as data released towards the end of the week showed the US economy grew moderately in the fourth quarter, with business investment stabilising in January and the labour market also looking solid.
We always encourage clients to take a long-term view during periods of market turbulence. We publish weekly updates on what is driving markets and we will continue to update on market developments. If you have any specific concerns, please contact your 1825 planner.
The week ahead
After the worst week for global markets since the financial crisis, over 10 years ago, it is a fair assumption that the news flow concerning the Coronavirus will once again dictate market movements.
However, next week offers us a chance to really gauge the fundamentals of the global economy as a wealth of data points become available. With new cases of the Coronavirus actually having fallen in China, the country of its origin, over the past week, economists will be hoping that the disease has had a less profound effect on the economy than previously feared. Monday Caixin Manufacturing PMI should give us some idea as to the extent of the damage, detailing the results of around 500 purchasing managers in China, who will rate the current level of business conditions including employment, production and inventories. Acting as a leading indicator of economic health - businesses react quickly to market conditions, and their purchasing managers hold perhaps the most current and relevant insight into their company's view of the economy, purely through the nature of their jobs.
With oil having fallen to below $50 a barrel on the back of the recent turmoil, this week presents the perfect impunity to focus in on black gold as Thursday sees the Organisation of Petroleum Exporting Countries (OPEC) meet in Vienna. They will be discussing a range of issues regarding energy markets, setting limits and quotas on how much oil they will produce. The meetings are closed to the media, but officials usually talk with reporters throughout the day and a formal statement covering policy shifts and meeting objectives is released after all major points have been discussed.
The first Friday of the month is wrapped up as always with US Non-Farm Payroll data. A key piece of information when determining the US central bank’s next rate move, the employment data will be accompanied by Average Hourly Earnings, allowing us to gauge how inflation may manifest in the world’s largest economy.
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 February 2020.