The Lowdown │ Global Markets to 9 March 2020

The Lowdown Global Markets to 9 March 2020

Published March 9, 2020


  • It’s another difficult week for global stock markets as uncertainty over the coronavirus continues to affect sentiment towards risk assets.
  • The Federal Reserve Bank cuts interest rates by 0.50 basis points, with the central banks of Australia and Canada taking similar action.
  • The 10-year Treasury benchmark yield falls below the physiological 1% level for the first time ever as global investors continue to seek out bonds as safe-haven assets.
  • In UK, the Bank of England is now expected to cut interest rates to a record low while Brexit negotiations continue.
  • In the commodity and energy markets, the price of gold bullion continues to rally as investors seek out safe-haven assets. The price of crude oil collapses as OPEC fails to agree production cuts.
  • Global equity markets are likely to suffer further, but recent weakness has created some very good opportunities for long-term investors.

Global Market Summary

It was another difficult week for global stock markets: investors continued to abandon their risk-on strategy, selling down equities on the days when the equity markets tried to show some signs of recovery. The result was further volatility, with speculation mounting over just how hard the coronavirus will hit the global economy.
With uncertainty shrouding the long-term global impact of the COVID-19 virus, the pandemic is now threatening to derail global economic growth, leading to economists downgrading their forecasts for 2020 and to companies withdrawing their future corporate earnings guidance.
Many global sectors are likely to suffer – everything from travel and leisure, to transport, manufacturing and finance. Indeed, we have already seen a major dislocation in economic activity, with many of the world’s regions at a virtual standstill.
Disruption to the supply and demand chain has been severe, and commodity and energy prices have fallen significantly. The worst hit has been China, which has suffered a 30% fall in oil demand. The fall in demand for cars and smartphones is even greater. Europe, Asia and even the US are now experiencing the same problem.
Elsewhere, in the emerging markets the effects on growth have been less severe. Regions such as Brazil and India are relatively closed economies, and have less direct exposure to countries such as China. But that’s not to say that either is immune – Brazil will be affected by the recent fall in commodity prices.
The speed with which the financial markets have been repricing themselves in recent weeks is no surprise. The stock market does not wait and see how things pan out before reacting accordingly: instead, it tends to react very quickly to events. The result is far higher levels of volatility and – at times – behavioural anxiety, which is entirely understandable.
The VIX Index – colloquially referred to as the fear index – has risen dramatically in recent days, as it has done in past crises or periods of fear. But this is to be expected, giving the ongoing reports of increased coronavirus contamination throughout the world.
In response to the global economy weakening, the US Federal Reserve Bank decided to cut interest rates. This came as a significant surprise to the markets – it is unclear how lower borrowing costs will help the current situation. President Donald Trump has been applying pressure to the Fed, trying to get it to take swift action in relation to the crisis, and it now appears that he has finally had some influence. Over the ensuing days, the central banks of both Australia and Canada have taken similar action.
The Bank of England is now expected to cut interest rates in the UK at its next formal meeting of 26 March 2020, pushing them back down to a record low of 0.5%. Outgoing Bank of England governor Mark Carney recently warned that the COVID-19 virus could result in a shock to the economy that could last about six months. But he went on to say that this would have a disruptive effect… not a destructive one.
The UK’s other distraction is still Brexit, with chief Brexit negotiator David Frost meeting his EU counterpart Michel Barnier. After the first round of talks, Mr Banier declared that “serious differences” remained between the UK and the EU. At the same time, the UK government calculated that a post-Brexit trade deal with the US would boost the British economy by 0.16% over the next 15 years.
The UK economy does seem to be holding up well under the circumstances, with many commentators upgrading their GDP growth forecasts for 2020 and 2021. Furthermore, the government appears to be ready to loosen fiscal policy by around 0.5% of GDP in the forthcoming budget, although the impact will take time to make itself felt.
In the US, the focus was on the primaries and Super Tuesday. It ended up being a good day for candidate Joe Biden: he is now the favourite to win the Democratic nomination, dispelling any chances of a “progressive” being selected to take on President Trump.
The US market rallied by up to 4% on Wednesday on the back of what many market traders termed the “Joementum effect”. Unfortunately, the recovery was short-lived: the market resumed its downward trend later in the week.
Nevertheless, the latest US employment data showed that 273,000 jobs were added in February, and the unemployment rate had fallen back down to a 50-year low (according to figures from the Labour Department).
Coronavirus jitters manifestly continued to affect the global equities markets last week, catalysing further stampedes out of stocks and into bonds. This, in turn, led to the unthinkable happening: the US 10-year Treasury bond yield fell below 1%, eventually closing out the week at 0.76%. Gold was another safe -haven asset to benefit from last week’s uncertainties, rallying close to a seven-year high and now heading towards US$1700 per troy ounce.
However, in the energy market the price of oil plunged dramatically following OPEC’s failure to agree on a massive production cut. This has led to some oil analysts believing that US$20 per barrel may now be on the cards in 2020, which would have major geopolitical implications.
Although we are likely to see further sell-offs in the equity markets over the coming weeks, it is encouraging that the central banks and governments around the world are ready to step in to try and limit any further economic damage. China in particular is in a strong position to provide further assistance, which should act as a stabiliser over the long term.
On average, global equity markets have recorded falls of just over 9% this year, while sovereign bond markets have delivered positive returns. We may have already suffered from the global economic earthquake created by the coronavirus; and we are likely to agonise over the forthcoming tsunami which will result from a fall in corporate profitability. Nevertheless we continue to believe that the situation offers some excellent buying opportunities for longer-term investors.
Although we acknowledge the threats that have emerged in recent weeks and which are likely to affect the financial markets in the short term, the attractions now being presented to us in certain equity markets are very much worth investing in.
Warren Buffett is renowned for his numerous adages and aphorisms, and at a time like this, one in particular springs to mind: “be fearful when others are greedy and be greedy when others are fearful”. There is clearly a great deal of fear in the markets – and indeed the world – at this current time. But if there is one thing we have learned, it is that markets tend to be resilient and rewarding over long-term time horizons.