Author: Trevor Hubner
The last week has very much seen the return of extreme volatility to stock markets. The week ending Friday 12th June saw significant market falls as fears gripped markets about the possibility of a second wave of COVID19. From a high of 6511 on Monday the FTSE fell by around 8% to 5993 on Friday before recovering to close the week at 6105. This was just under 6% lower for the week and all global markets suffered similarly. Last week also saw the UK GDP for April fall by over 20% which, although broadly anticipated, still had some investors hitting the panic button.
However, we have since seen a significant bounce back as markets reacted positively to the news coming from the US Federal Reserve. They announced further measures to support the market during the coronavirus pandemic, expanding their bond buying operations to maintain low borrowing rates to help the US economy through the recession. The meeting minutes showed that nearly all the Fed policymakers foresee no rate hike until the end of 2022 at the earliest. The flow of cheap money looks set to continue and this has pushed markets back upwards. Dramatic though last weeks falls were, all the major stock markets remain very much in the positive for the month and a long way from the lows of March.
It would seem we will continue to see extreme volatility for the foreseeable future. Any bad news concerning a second wave will cause a large sell off, with a corresponding recovery coming as either central banks adapt policy or the second wave threat eases. Markets seem to want to be optimistic about economies bouncing back, the so called V shaped recovery, while there is perhaps more caution being advised from other areas. At time of writing we have seen a further rally as markets reacted positively to the latest US retail sales figures that showed an increase of 17.7%. Analysts had expected better news as shops reopened but in a rerun of the recent employment figure, woefully missed the target having forecast an increase of 8%. Again it feels almost as though the economists cannot see beyond the negative as well as markets can.
In these circumstances it is tricky to know where to put your money. All information tends to be contradictory and the market is swinging wildly on each different piece of news. The only thing that seems certain is that we are far from out of the woods yet and the fear of a second wave is very real. However, what is questionable is whether a second wave would cause as much economic disruption as the initial outbreak? Not only have we learnt a fair amount about how the virus spreads and what can possibly done to slow the transmission, but there is also the matter of cost. It is debatable whether the world can afford to lock down a second time and the more pragmatic will be pushing to avoid this.
There is a financial index called the VIX which measures volatility. More commonly known as the fear index, it goes up as uncertain rises and falls as markets gain direction. It is probably worth watching what this does over the coming months.