INSIGHTS

Duncan Donald

Mon, Mar 9


Markets fall as oil dispute fuels the Coronavirus hit stock markets

 

The last week in the financial markets will, unfortunately, be one that is looked back on in history for all the wrong reasons.  With the virus starting to take hold across the world most significantly in South Korea, Japan and Italy and with the early signs of a foothold of infection forming in Seattle and New York in the US and across the UK panic is starting to set in.  Normally this panic is isolated to those types who chose to fill their cupboards with food and supplies. However, last week panic was seen from the central banking community. 

 

With major stock indices continually coming under downside pressure on a daily basis as fear has set into the market, we firstly saw Australia chose to cut interest rates, this was very much as expected due to the Australian markets strong correlation to the Chinese markets from an import/export perspective. 

 

It was the US Federal Reserve that created the biggest shock of the week. Having been under heavy pressure from President Trump to lower interest rates to stimulate the economy the Fed took the bold step of acting between scheduled meetings and cutting rates by 50 basis points. 

 

The initial reaction by the stock markets was positivity but in no time at all that was reversed as the speculation rose that perhaps the threats of the virus were greater than expected in the US and the Fed had panicked, so much so that it’s now expected that we see further cuts from them next week if not before. 

 

Even the success of Joe Biden in the Democratic Presidential Primaries was incapable of bringing any respite to the downwards trajectory of the markets. Fridays US Employment data leap also failed to bring any meaningful buyers to the market as virus updates from around the globe continued to dictate the markets. 

 

With the weekends always creating the danger of gap risk on open positions, there was some buying at the close as positions were lightened as the investors looked for a steady weekend of news updates. That wasn’t to be, and as we heard of growing cases across Europe, with Italy having to take the step of enforcing non-travel on nearly 16 million in infected regions. 

 

However, there was worse still to come for the markets at the open as Russia and Saudi Arabia could not find resolution in the OPEC talks with Russia walking out of the discussions meaning at the open last night oil immediately fell from $42 a barrel to below $30 plunging even more misery on the markets bringing a further flight to safe haven with the Japanese Yen and Swiss Franc being bought.

 

One asset class that has had an interesting journey in the last week is Gold. The textbooks teach us that at times like these its the go-to asset and whilst its week on week performance is positive, the upward trajectory has not matched the downside plunge seen in stocks. The only reasonable explanation for this is that as investors looking to fund margin on losing positions look to free up cash to do so, gold positions could be that sacrifice. If we also bear in mind central banks who are looking to stimulate their economy and fund emergency aid programmes will also hold some of the bigger gold positions we could have the answer to the disjointed path of gold over the last week. 

 

The week ahead will undoubtedly be volatile as the virus progresses into new territories. All eyes will be the world's central banks and governments as they look to stabilise and steady their economies with some form of stimulus.  The ECB is the only central bank scheduled to meet this week with new head Christine Lagarde having one of the toughest jobs as the virus grows throughout Europe. 

 

The challenge she faces is the lack of interest rate options available to her with rates being historically low, meaning further Quantitative easing is her only option. This poses the further issue of what do they buy with bonds becoming limited by past buying programmes meaning they may need to look to stock purchases.

 

In the UK it feels like we are at the start of an inevitable surge in cases of the virus and whilst the FTSE has fallen with global stocks the Pound has performed well. We hear from the new Chancellor of the Exchequer on Wednesday with his budget which couldn’t come at a more pertinent time. With the markets shifting on a daily basis forecasting specific outcomes will be incredibly tricky and for that reason, we would expect the event to cause volatility. 

 

The Week Ahead 

 

Monday:

  •         Balance of trade – Germany
  •         Industrial Production - Germany

Tuesday:

  •         Inflation Rate – China
  •         Machine Tool Orders – Japan
  •         GDP Growth Rate – Eurozone
  •         Unemployment Rate – South Korea

Wednesday:

  •         GDP Growth Rate – UK
  •         Industrial Production – UK
  •         Manufacturing Production – UK
  •         Inflation Rate – US

Thursday:

  •         Industrial Production – Eurozone
  •         ECB Interest Rate Decision

Friday:

  •         Vehicles Sales – China
  •         Inflation Rate – Germany
  •         Bank Of England Meeting
  •         Michigan Consumer Sentiment - US

 


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