MARKET UPDATE WEEK ENDING 6TH MARCH

CORONAVIRUS CONTINUES TO DISRUPT MARKETS

The Coronavirus – now officially named COVID 19 – has caused volatility in global stock markets to a level not seen since the height of the Global Financial crisis in 2008. While overall sentiment remains very much to the negative, there have also been sessions where markets have rallied sharply as authorities are seen to take steps to help in the fight against the virus.

On Monday the World Bank and the International Monetary Fund ( IMF ) simultaneously announced that they were prepared to help countries affected by the virus with their Emergency Lending Programs and all other financial tools available to them. Combined this is an initial pledge of some $62BN and it has been joined by a promise of $16BN from the Chinese state and $8.3BN from US Congress. These announcements suggested to markets that the authorities were taking the threat seriously and increased speculation that Central banks would also offer further stimulus to the economy by cutting interest rates. Monday saw the Dow Jones Index in New York record its strongest ever rally in points terms, rising by over 1,300.

However, as is often the case, speculation drives markets beyond a level justified by the predicted action. In a classic example of “buy the rumour, sell the fact” when the Federal reserve did intervene with an emergency rate cut of half a percent on Tuesday, markets fell heavily. The volatility has been extreme during the week (through to Thursday) with the Dow Jones Index showing a trading range of 4000 points as markets reacted to both positive and negative news. It is worth noting that after all the movement, as of Friday morning both of these indices were still marginally in positive territory for the week, although with one trading day remaining this situation is likely to change. The problem would appear to be that while there is a relief rally as markets digest the fact that the authorities are acting, this news tends to come with the caveat of “what do they know that they are not telling us”and consequently corrections tend to be short-lived.

As has been the case since the beginning of this outbreak, winners have been few and far apart but US treasuries and other safe havens continue to see considerable inflows. This is perhaps best shown in 10 year US Treasuries which have seen a drop in yield from 2.01% at the beginning of the year to 0.95% now. These bonds show the cost of government borrowing and tend to be an indicator of how the economy might look in the future. By yielding (or paying interest of) under 1% over 10 years it seems likely that interest rates in general are likely to stay at extremely low levels for some time yet. As mentioned previously, lower interest rates tends to be positive for stocks but it does depend on how the situation with COVID 19 evolves.

While the above paints a technical picture of the effect the virus could have on a larger, or macro scale, it is important to understand that it is being felt at a very real level already and that this is the potential issue for a great many people. On Thursday this week the troubled airline Flybe
went into administration, at the loss of 2000 jobs. It is true to say that the company has had its problems in recent times and was close to bankruptcy at the turn of the year, but COVID 19 has caused a drop in passenger numbers and future bookings that have made the business
unviable. What is true for an airline is also true for hotels, restaurants and shops everywhere, all of which are suffering from lower revenues as people chose to stay way from crowds in an effort to avoid contagion. While big institutions such as banks are able to lower their risk by
splitting their workforce between different locations, this option is not available to most businesses and it is likely to be here that the impact will one felt first should the virus become pandemic as suspected.

Written by Trevor Hubner