Coronavirus rules the financial markets
The last two weeks of February 2020 were emotional ones. The equity market collapsed, as did oil and gas, and other commodities. The direct consequences of the Coronavirus psychosis. Investors rushed to “safe havens”: assets such as gold, the Swiss franc or the US dollar and US 10-year treasury bond.
It most certainly does - with current UK economic contraction estimates of anywhere between 7% and 25% - the equivalent of a complete loss of pretty much a quarter of all economic activity.
These estimates underline just how vulnerable the world markets are and how a, seemingly, unrelated factor such as covid-19 has become the biggest player in the markets for almost a century - and not in a good way.
And yet, this week across the pond in the USA, as if in some strong show of defiance, the US S&P 500 Index has increased with the Dow Jones and the Nasdaq 100 also showing up movements. Elsewhere, the Nikkei in Japan showed a marginal increase.
Despite this minor optimism in the markets, and to keep matters in perspective, any joy there is vastly over-shadowed by the unemployment figures business closures that have risen beyond any recent compare and auger a depression to match, if not exceed, that of a century ago.
So we have an economy on a severe downturn and a stock market that is the giving off positive vibes in all probability stoked by the Federal Reserve’s corporate lending program announcement of $2.3 trillion.
The current optimism in the markets reflects a belief that there is light at the end of the tunnel and that, despite the general income and employment reductions there will not be business closures on a grand scale and employment and spending will pick up sooner rather later.
A similar pattern can be seen in Europe - the FTSE has risen from the five year low of 23rd March at 4293 up to yesterday’s closing price of 5,842. If we look across at the markets in France and Germany we can see the CAC and DAX repeating this configuration.
So there is confidence in the markets at least, and in the actions of the policy makers, whilst on the streets there remains limited confidence that an end to the spread of, and subsequent deaths from, corona-virus is in sight.
The impacts are being felt right across the board, near and far. Firstly on a note close to home I have kept an eye monitoring, and juggling, some of the funds that I have investments in as it was clear there were the inevitable, and significantly large, drawdowns and redemptions by shareholders during the first quarter of 2020 in some.
Of note one particular fund, shortly after I moved my investment, announced that the board had considered all impacting events and concluded that it was no longer economically viable to maintain the operations of the fund, and as such, the directors resolved to terminate the fund. So it pays to keep a daily or even hourly watch time-frame on investments these days.
On a somewhat less personal note the pound, carrying on from the Easter increase got slightly stronger supported by the news that the UK Prime Minister was out of intensive care and recovering well. Whether it will continue this minor trend will depend very much on any announcement today on the outcome of further Brexit discussions taking place between negotiators of the UK and the EU for a timetable on the next round of talks.
Meanwhile, in the UK, we have reports of political infighting between the so-called ‘doves’ and ‘hawks’ as to how much longer the lock-down period should be imposed for, with the former advocating a continuance throughout May and the latter group pressing for an early release at the start of May.
The obvious concerns driving these internal discussions are both the economic and health impacts. There are also very real concerns that if the economy and sterling values drop to even more damaging levels then China, who are generally agreed to be the root cause of the pandemic, would have the opportunity to acquire UK assets at a fraction of their true worth.
Estimates of the cost of the UK’s shutdown range around £2.5 billion per day which begs the obvious question, and the paramount concern for the politicians and the economists alike, as to how long the UK can sustain such losses and then still be able to revive the economy out the other side of the lockdown.
To get a clearer idea, and to put things into a little more perspective as to the scale of the global economic downturn you just have to look at the financial plans readied by some of the world’s major countries in comparison to their 2019 GDP as described in the following table:
| GDP 2019 | Package | % Of 2019 GDP | |
|---|---|---|---|
| USA | £17.1 trillion | £1.9 trillion | 11.1% |
| UK | £2.2 trillion | £350 billion | 16% |
| Canada | £1.4 trillion | £64 billion | 4.6% |
| France | £2.2 trillion | £96.1 billion | 4.4% |
| Germany | £3.1 trillion | £654.4 billion | 21.2% |
| Japan | £4.1 trillion | £805.1 billion | 19.5% |
| Italy | £1.6 trillion | £349.3 billion | 22% |
| Switzerland | £572.5 billion | £34.8 billion | 6% |
So yes, right now covid-19 definitely rules the financial markets and will continue to do so for the foreseeable future.