Global stock markets showed greater resilience last week with less severe swings than we have been seeing recently. That is not to say that there wasn’t volatility of a level that in normal times would be significant, but such is the current situation this narrower trading range should be seen in a more positive light. Markets have approved of sustained government intervention in the form of support for businesses and the individual, and there has also been recognition of positive central bank policies such as looser fiscal limits and support for parts of the bond market. It is, however, still far too soon to say with any confidence that markets have found their low level.
It is important in current circumstances to retain the positive view point that a recovery will happen. Therefore, the questions become when and why this will happen ? Most economic commentators appreciate the need for social distancing and the subsequent temporary closure of many businesses and the economic slow down. However, we must are also look at what will happen when we turn a corner in the battle against the virus and how and when governments will react and loosen current restrictions. It is broadly considered that the global economy will be able to cope to some degree, with a shutdown of a month or possibly two, but beyond this there is the potential for the situation to become uncontrollable and lead to a full economic depression. When you remember that we are barely, or arguably not fully out of the financial crisis of 2008 onwards, the global economy is not in great shape to manage such a sustained downturn.
While there is no definitive answer to this question yet, focus is turning to the data about infection rates and how this may indicate the length of the shutdown and consequent recovery. Lack of global consensus on how to record the spread of COVID 19, together with doubt over the accuracy of the statistics coming from China, has delayed getting usable data to predict the trajectory of the virus. It is believed that more reliable infection data will be available imminently and this will have a big influence on market direction. If the rate of infection is higher than previously thought it would suggest that more people have had the virus and recovered and will now have a degree of immunity. If this is the case then there is scope for some degree of optimism that the economy may at least partially reopen sooner than previously assumed, which would be seen as positive for markets and likely lead to a sharp rebound. China, having been the first hit by the virus has shown definite signs of economic activity returning and the positive view would be to hope the rest of the world follows this same path.
However, the opposite is also true and, should the data suggest a lower infection rate, the mortality rate from the virus will be of a level that means the lockdown will continue for a longer period. A second out break in China or elsewhere would also be an extreme negative. As always markets dislike uncertainty and, although there will be some bargain hunting going on for underpriced assets, there will not be any sustained recovery until there is more clarity over the nature and likely course of the virus.
Further news comes in thick and fast currently and picking out the developments that will be most significant over time is extremely hard. It maybe that the following points are influential in the coming months.
- Unemployment – The rate of unemployment has jumped and seems likely to increase in the coming months. In the US 10m people applied for unemployment benefits in the last 2 weeks of March and this is expected to rise. The drag on the data means it is hard to give an accurate unto date figure but experts in the states suggest the unemployment rate there could already be close to the 10% level seen between 2007 and 2009. Whether this is temporary or a longer term trend is again dependant on the speed at which the economy is able to recover.
- Oil price – This spiked last week as Donald Trump announced that he had negotiated a truce between Russia and Saudi Arabia to limit supply. Although both parities denied a deal had been done, Brent crude still recorded its biggest every weekly gain and has held most of this as the news from the 2 protagonists is that a deal is “very very close”.
- In the UK banks were told to cancel paying a dividend by the Prudential Regulatory Authority (PRU). This equates to £7.4bn not being paid to share holders in coming weeks. While you can understand caution, it should be remembered that the various stress tests and changes in regulation since 2008 mean that UK banks are in good health, with the combined balance sheet of the UKs 5 biggest lenders standing at £6.5 trn. There are clearly reasons for this action but eye brows have been raised. MARKET UPDATE 6th APRIL 2020
- Europe – The situation in Europe is not good. Italy and Spain are amongst the hardest hit countries in terms of infection and death rates and are desperate for financial help. Neither fully recovered from the financial crisis and have limited resources. Their banks, especially in Italy are also not thought to be as sound as other countries. They, together with 7 other European countries, including France, have lobbied for so called Coronabonds to be issued to effectively pool the burden of fighting the virus across their EU partners. However, this is being resisted by Germany, The Netherlands, Austria and Finland who do not want to be liable for debt together with these other, highly leveraged countries. Italy even took the unusual step of placing an advert in the German press asking for a reconsideration. It would be hoped that action is taken to help Italy and Spain before the situation escalates but anti EU sentiment has certainly risen in these countries which will only increase.