Duncan Donald

Mon, Mar 2

Sharp reversal in global stocks as a surge of cases outwith China


Last week saw a significant global shift in the Coronavirus as many cases were reported throughout the world. As Chinese daily cases start to recede the progression of infection is escalating sharply in South Korea, Japan, Iran and Italy. There have also been many first cases reported throughout the world, spooking the investing world and creating one of the sharpest corrections lower seen in global stocks since the 1930s. 


Following on from the trend seen in the last two days of the previous week, stocks started the week lower,  but as the week went on the escalation of cases brought panic selling at an alarming rate, bringing the US S&P down from the year highs of 3400, down 16% to lows of 2855 on Friday with all other major indices following suit as things looked to be spiralling out of control. 


Flight to safe-haven assets was in full flow as the Japanese Yen and Swiss Franc appreciated and Bonds soared pushing yields on US 10 Year bonds to the 1% level.  One asset that disjointed from typical behaviour last week was Gold. Typically we would see an event like this have the metal soaring, but its believed there was significant profit-taking selling brought by investors liquidating the good positions to pay for and fund the bad. 


Anticipation was for further downside at the Asian open last night after Chinese Manufacturing PMI fell from 50 last month to 35.7 this data is thought to be the first meaningful insight to the true economic effects of the virus and it was worse than expected. However after a lurch lower at the open by nearly 2% the markets rebounded and started the week positively. The driver of this was positive statements from the Bank of Japan showing their readiness to do whatever is required to stimulate the economy as the virus grips the country. 


This week’s primary focus will be on the reaction of the world’s major Central Banks the markets need a kick start and it’s at times like these the Central Banks need to be proactive, however, should they dither or delay the selling could well return quickly. There are many rumours regarding collaborative intervention this week like was seen in 2008, however, they remain unsubstantiated. We do have scheduled rate-setting meetings from the RBA early tomorrow, who in the face of a tumbling Aussie Dollar will be forced to cut rates. On Wednesday we hear from The Canadian Central Bank who have seen their currency weaken as global demand for oil has fallen taking the price to $45 per barrel, so again action is required. 


In the US the “will they won’t they cut rates” question for Jerome Powells Fed Reserve has changed to “how soon and how much”.  The market has now fully priced in a March cut of at least 25 bps with many expecting 50 bps but all eyes will be on Fed speakers or the mention of extraordinary meetings, the same can be said for the UK and Eurozone with the latter having less scope due to the current low level of rates meaning additional methods of stimulus will be required. 


In the UK the Pound trades heavily sustaining the move below 1.3000, currently trading around  1.2800 as the UK heads into negotiations with the EU. Domestically the accusation of harassment by the Home Secretary Priti Patel on the Home Office head has dented the top-level leadership. Over the weekend PM Johnson warned that there will be more cases of the virus to come, but assured that the NHS was well placed to deal with it. Additionally this week the UK will look to solidify a trade deal with the US. 


The Week Ahead 



- Markit Manufacturing PMI: IT, FR, DE, Eurozone 

- Mortgage Data: UK 

- GDP 2019: IT 

- ISM Manufacturing PMI: US 



- Interest Rate Decision: Australia 

- Consumer Confidence: Japan 

- Unemployment Rate: Eurozone 

- Total Vehicle Sales: US 



- GDP 2019: Australia 

- Interest Rate Decision: Canada 

- ISM Composite PMI: US 



- Factory Orders: US 



- Halifax House Price Index: UK 

- Non Farm Payrolls: US