Markets and key events

Markets rally as central banks and governments counter sudden stop in economic activity

Stocks rallied aggressively this week, having hit a low point on Monday, as expectations rose for the United States to follow other developed economies, including France, Germany, Italy and the UK, in delivering a huge fiscal stimulus package, worth as much as $2 trillion.  This dwarfs the $800 billion rescue package delivered during the financial crisis of 2008/09.  Whilst central banks have tackled illiquidity in markets, governments have increasingly stepped up to the plate with fiscal support, designed to plug the sudden stop in economic activity, as countries adopt social distancing measures to counteract the coronavirus.

US jobless claims surge by over 3 million

On Tuesday, the US Dow Jones index, which measures the share prices of 30 of the largest US companies, had its biggest one day rally since 1933, during the Great Depression, rising by 11.4%.  In this week, the US Federal Reserve also pledged to buy an unlimited amount of US government bonds to act as back stop for the US investment grade corporate bond market.  US jobless claims surged by over 3 million, to a record 3.3m, and the US overtook China as the country with the largest number of coronavirus infections.  Figures out of China on Friday showed a near 40% fall in industrial profits to the end of February, a drop of almost $60 billion.

Bear market rally or has a low point been reached?

As of 12pm London time on Friday, US equities have risen by 14.1% over the week, European shares rose 5.8%, with the UK market climbing 6.9%.  Japanese shares rose 13.7%, whilst Australia’s gains for the week were all but wiped out on Friday, as Australian shares gained 0.5% over the week, as the rally in markets showed signs of petering out.   Emerging markets increased by 6.0%, with South Korea returning 9.7%, whilst Indian shares fell 0.3%, having collapsed by 13% on Monday, their worst day on record, just ahead of Prime Minister Modi announcing a lockdown on its population of 1.3 billion people for twenty-one days.

Recovery in haven assets

As the US Federal Reserve, European Central Bank and the Bank of England, amongst others, pledged to buy bonds and provide liquidity, some semblance of normality returned to haven assets as government bonds rallied.  The yield on 10-year US Treasuries, which moves inversely to price, fell to 0.78%, German bunds rallied to minus 0.45% and UK gilts 0.36%.   The gold price, which has been buffeted by investors desperate for liquidity, rose by 10.1%, now trading at $1,638 an ounce.  The US dollar, which appreciates as global liquidity dries up, eased this week, as it fell by 2.6% and 5.1% versus the Euro and Sterling, now trading at $1.10 and $1.22 respectively, having fallen beneath $.1.15 versus Sterling on Monday.

Issues under discussion

Government and central bank action dwarfs 2008/09 financial crisis

There has been a massive response from both central banks and governments this week in response to the coronavirus.  These have not only dwarfed the support provided during the financial crisis of 2008/09, but they have also been delivered much more speedily, in part because the relatively recent experience of the financial crisis has made these actions much more politically acceptable.  In response both equity and bond markets have responded positively.

Natural disaster or financial crisis?

Markets today are trying to ascertain whether this is more like a natural disaster, which typically has a much sharper recovery profile, or whether it morphs into a financial crisis, which economically, are much more drawn out.

Quantifying the impact

With the fire power on offer from both central banks and governments, we continue to believe that this will be a relatively short, but deep recession.  However, today, markets have no way of quantifying the impact.  Therefore, until the number of new cases of coronavirus peaks, or scientists change their assessment of the risk posed to the human population, investors are not out of the woods yet and markets could yet fall to new lows.

The information provided above is for Professional Advisers: All data has been sourced from Lipper. Any investment must be made in conjunction with reading the relevant KIID or Investment Mandate. Clients should be aware that the value of investments and the income from the may fall as well as rise and they may not get back the amount originally invested. Investors should note that the views expressed and information given were current at the time of publication but may no longer be so and/or may have been acted upon by the Investment Manager already. Source SmartIM