Coronavirus fears continued to batter global markets – global equity indices fell, oil prices collapsed and the US dollar strengthened.
The S&P 500’s closing low of 2,304 on Monday 20th March was the fastest peak-to-trough drop in market history, at 23 trading days. One of the biggest casualties has been energy markets with Brent crude oil down 65% year-to-date (end-March). The sell-off has been broad with developed markets holding up slightly better than developing markets. The US dollar has shown strength against all currencies due to its role as the reserve currency of the world (i.e. favoured by central banks for their foreign exchange reserves).
In terms of overcoming the Covid-19 pandemic from an economic perspective, there is consensus between most economists, academics and market participants that there are four primary factors to consider:
- Fiscal and monetary stimulus – achieved
- Flattening of the curve – achievable near-term
- Return to work – achievable near-term
- Vaccines and therapeutics – achievable medium to long-term
The first point has been largely achieved (or aggressively initiated) after the US Federal Reserve, and other key central banks, provided support though major unprecedented stimulus packages. The US led the way with a $2 trillion package aimed at supporting businesses and workers impacted by the coronavirus. A positive has been the speed and urgency of the international response which is a lesson learnt from the 2008 Global Financial Crisis. These various measures will help the global economy recover quicker (with less permanent damage) provided points 2 and 3 are within reach.
The escalation in new cases will need to slow dramatically so that people can return to full-time work. Only once that point is reached (flattening of the curve) can the economic impact of the pandemic begin to be estimated and quantified
On point 3, the Chinese economic rebound is already underway and being reflected in the latest economic statistics coming through, e.g. the Chinese manufacturing purchasing managers index (PMI) jumped to 52.0 for March, up from 35.7 in February (ahead of the market forecast of 45.0). This is significant as it gives the world a tangible glimpse that the end is within reach.
The US and Europe will be hoping to reach peak cases in the next 2-3 weeks. That will allow talk of things returning to ‘normal’ at some point in the near future. The combination of pent-up consumer demand and wholesale restocking could help give these economies an early boost.
Points 1 to 3 attempt to limit the impact, both economically and health wise, but point 4 is the silver bullet – effective vaccines and therapeutics. There are numerous trials on the go worldwide, both vaccines and treatments, but nothing concrete is expected to materialise for twelve to eighteen months.
This crisis is unprecedented in most peoples’ lifetimes, as anyone who experienced the Spanish flu (our reference point) would be 100 years old. Healthcare has advanced lightyears since 1918 yet the response the world has taken is, to a large extent, based off what worked 100 years ago, i.e. social distancing and lockdowns. Lockdowns have halted economic activity and will have a highly damaging and lasting effect on businesses worldwide. This is not to say it was the incorrect course of action. Many lessons will be learnt from this crisis, many of which will only be known once the pandemic is behind us. There is the fear that the economic cost (unemployment, increased poverty in the developing world) of the pandemic may in the end outweigh the health crisis, but only time will tell.
A positive signal for markets has been the rally since the March 23rd lows. There is a real possibility that this low will be retested but we have seen many big down days followed by big up days. This tells us that there is still a healthy appetite for stocks and that the market is not overly pessimistic. We do feel that April is a crucial month for the world and will to a large extent set the tone for the rest of 2020.
GLOBAL INDICATORS: Local reporting currencies