Markets look to governments to step into the void in a demand shock

It has been a very volatile week in markets as fears over the economic impact of the Coronavirus have risen as the number of new infections has escalated, leading to governments taking more draconian measures to get it under control.  What is clear is that markets are not content with central bank action, despite it being immediate and large in scale.  The shutdown of economies is going to heavily impact jobs and companies and therefore governments need to step into the void, and until they do so, prices will remain under pressure.  Towards the end of this week, as more governments have stepped forward promising action, there has been some stabilisation in markets.  However, it is one thing promising action and another delivering on it.

US equities experience their single largest day loss since the crash of October 1987

As of 12pm London time on Friday, US equities are down 11.1%, however, in Sterling terms, US equities are down 5.5%, as the US dollar appreciated dramatically against most currencies amidst a dollar funding squeeze.  European equities are down 1.6% over the week, although in Sterling terms, they have actually risen 0.4% as Sterling came under pressure against most major currencies this week.  UK equities have fallen 4.1%, with most of the pain being experienced within mid and small cap companies, with the UK mid cap index falling 11.7% versus 1.9% for large cap companies.  Japanese equities rose 1.7% as the Bank of Japan announced that it would double its purchases of Japanese equities through exchange traded funds to 12 trillion Yen a year, equivalent to $112 billion.  The Japanese market was further boosted by rising expectations for fiscal support from the Japanese government. However, for Australian equities, exposed to financial and mining stocks, the market fell 13.1% over the week.  Emerging markets dropped 14%, with China and Hong Kong remaining relatively defensive, falling 4.9% and 5.1% respectively.  India fell 12.3% and Brazil lost 17.4%, with the latter being hit particularly badly from a further collapse in the oil price during the week.

Few places to hide

It was also a difficult week for defensive assets, despite the Federal Reserve enacting an emergency interest rate cut of 1% on Sunday, taking rates to a range of 0% to 0.25%. The stress came from a US dollar squeeze, as demand spiked from countries and companies funded in dollars to keep themselves financed.  This culminated in liquidity drying up, as investors increasingly turned to their most liquid assets as cash was required, leading to a selloff in government bonds and, once again, gold.  Yields, which move inversely to price, on 10-year US Treasuries rose to a peak of 1.26% on Thursday, having traded as low as 0.65% at the beginning of the week, whilst UK Gilts went from a yield of 0.40% to 1.01%, and German bunds swung from minus 0.58% to minus 0.15% over the same period.  The government bond market started to behave more normally as the US Federal Reserve announced on Thursday that it would open up US dollar swap lines with more central banks globally.  This coincided with the Bank of England cutting interest rates to 0.1% and expanding its bond buying programme by £200bn, and the European Central Bank announcing a plan to buy $750bn of bonds.  This led to government bonds rallying, with 10-year yields on US Treasuries falling to 1.01% by Friday, with German Bunds trading at minus 0.28% and UK Gilts 0.58%.  Similarly, the gold price fell from $1,560 an ounce on Monday, to $1,451 at its lowest point on the same day, before clawing back some of those losses during wild durations over the remainder of the week, and now currently trading at $1,507 an ounce.

Wild swings in the oil price

Amidst the economic hit from the coronavirus, the oil price took a second leg down this week, falling over 25% by Wednesday, with Brent crude trading as low as $24.5 a barrel and US WTI (West Texas Intermediate) trading down to $20.1 a barrel.  As governments increasingly came out pledging fiscal action, there was a strong bounce back on Thursday, with WTI rising by 25% to $25.3 a barrel, its biggest one-day gain on record.  Brent is currently trading at $29.2, and WTI $25.6 a barrel, however, pricing remains very volatile.

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