The World In A Week – Interim Update
US GDP fell 1.2% quarter-on-quarter; however, you may have seen the media run with headlines that stated growth falling by 4.8%. It seems pointless to annualise the data at this point, as one thing is almost certain; the next quarter will be a very different number.
There was no movement from the Federal Reserve, who held their Federal Open Market Committee meeting yesterday. They have already committed to do whatever it takes and the drop in GDP was fully expected, which was reiterated in Jerome Powell’s rhetoric.
Expectations are increasing on what the easing of the lockdown measures will look like in reality. Several European countries have already given broad indications of when the easing will begin. Preparations are apparently underway for the UK Government to issue detailed guidance on how Britain can safely go back to work.
Boris Johnson, after celebrating the birth of his son yesterday, is today expected to announce that the coronavirus is being contained, but that it is not yet time to lift the restrictions. Concern is about lifting the lockdown measures too early and run the real risk of a second spike of infections. Silver linings and management of expectations for the public is key at this moment.
The World In A Week - Balancing Act
The focus last week was mainly on the US, which is arguably seen as the new epicentre for the pandemic and, perhaps, the road map for the next phase in this battle.
US equities recorded their first weekly drop in April, illustrating a volatile week that saw indices buffeted by record unemployment claims, disappointing drug trials and an oil price that went negative. The week did end strongly though, as sentiment was lifted by the authorising of the fourth US economic relief package since the pandemic began.
President Trump signed off the $484 billion stimulus package into law, which aims to provide additional relief to small businesses, as well as hospitals, with the aim of increasing coronavirus testing. Never one to miss an opportunity to tweet, Trump also promoted the theory of pent-up demand on his Twitter feed; people in lockdown are generally spending less, meaning enforced savings, and it is those savings that could support a bounce back when the lockdown is lifted, as long as fear is contained.
Trump has also signalled support for ‘reopening’ in his Twitter feed, coinciding with the US state of Georgia, which has rolled back some of the lockdown measures, allowing small businesses such as hairdressers, spas and tattoo parlours to reopen. It also emphasises the dilemma of how social distancing will work at this interim stage, as all of the above businesses involve close contact.
The dichotomy of wanting to supply a service, to keep your business solvent, but at the same time wanting to keep your family safe through social distancing, is another challenge for people and governments to find a solution and tackle the fear of risk. If reopening is enacted too early, or people believe it is too early, fear of the virus could do more economic damage.
The next stage is a difficult balancing act of keeping the population safe, whilst managing people’s expectations for when the lockdown measures could be relaxed. Governments will want to restart their economies as soon as possible but acting too early could be worse than acting too late.
The World In A Week – Interim Update
There is always an anomaly that appears during a crisis to disrupt markets or economies to an extreme, and the COVID-19 crisis is no exception. Rising production and collapsing demand, due to a deliberate policy of an economic shutdown, is causing an unprecedented glut in the oil market. This has sent oil prices for West Texas Intermediate (WTI) to a multi-year low, which reached negative at one point.
Travel restrictions, due to social distancing stay-at-home sanctions, have reduced the global demand for oil by an estimated 5.6 million barrels per day (mb/d). Research conducted by BP shows that almost 58% of global oil demand is derived from fuel for transportation. This makes the current situation much worse than a normal recession because of the widespread implementation of travel restrictions.
This problem has been brewing for a while, with Russia and Saudi Arabia unable to agree on production cuts in early March. This caused a bizarre situation in which Saudi Arabia actually increased production and sparked a price war. The main oil producers gathered around the table at Easter and agreed to an historic cut in production to contain the oil glut. Production will be cut by 9.7 mb/d starting on 1st May. Cuts will begin to taper each month to 5.6 mb/d by the end of the year.
Despite the historic significance of the agreement, the agreed cuts do not appear to be aggressive enough to balance the large drop in demand. Oil inventories are likely to continue to rise in the short term, with storage facilities at capacity; this is putting further pressure on oil prices.
The anomaly of negative oil prices happened this week, with the May contract for oil delivery, for WTI, falling as low as -$40 a barrel. The situation was created by holders of the oil contracts having to pay to have the oil taken away and stored. Global storage of oil is almost at capacity, which increases the prices to have the commodity stored. This price of storage exceeded the actual price of the oil itself, thereby creating a negative contract.
This volatility in oil prices has spilled over into other asset classes, with global equities feeling the pressure. It is likely that the distortions we are seeing in the oil market will contribute to volatility in other asset classes, in the short term. However, it is expected that this period of extreme dislocation will dissipate in the second half of the year, as travel restrictions are gradually relaxed. So, while oil could contribute to volatility in equities and fixed income over the coming months, we do not expect it to become a major driver.
The World In A Week – Interim Update
Economic data is likely to become increasingly less reliable as a result of the COVID-19 lockdown. We know that the effect on the global economy will be bad, we just do not know how bad. That is why we are seeing significant stimulus packages from governments around the world and why they keep getting bigger. No sooner has the US announced stimulus package number three, at an impressive $2.2 trillion, there was expectation from politicians for stimulus package number four.
This dichotomy of knowing that the global economy is going to be damaged, but unable to accurately forecast to what extent, is why we have seen volatility in the markets and commitments to soften the blow increasing week-on-week.
Most economic data are survey based: industrial production, unemployment numbers, inflation numbers and various sentiment opinion polls need people to fill in the surveys. Filling in survey forms during a lockdown may not necessarily be representative of the whole. Social media spreads fear and affects sentiment and sentiment affects answers to surveys. Then you have issues such as consumer price inflation, which includes restaurant prices; how do you survey something that is not there?
It is likely that the data we will see coming out for the first quarter of 2020 will not be as reliable as it has been in the past. Interpolations of annualised numbers should be analysed with a fair degree of scepticism and investment decisions for the short term should not be made on this potentially soft foundation.
Although the extreme fear that was dominating much of March has slightly dissipated, we are still wary of the short-term outlook while in the midst of the virus crisis. Good news, such as the rumours that President Trump will cut taxes for US companies by suspending trade tariffs for 90 days, will elicit a good reaction from markets. While reports of increasing infection rates and deaths will provoke a negative reaction. Clear heads and predictable processes are needed in this phase of the crisis.
The World In A Week Interim Update - Apply. Rinse. Repeat.
This week we have seen the US Federal Reserve offer unlimited quantitative policy, along with various other bells and whistles. This is to keep the wheels of monetary policy lubricated; to encourage lending to companies by banks, and in turn this may save some jobs. It may also help to stabilise the markets, which would give enough breathing space to allow fiscal policy to be rolled out.
This is what we are seeing in the US. The Senate has now agreed a fiscal package worth over 9% of GDP and the buck is passed to The House of Representatives who will vote tomorrow on the $2 trillion deal. Co-ordination across the globe has been key and we have seen the European Central Bank announce today their unlimited commitment to asset purchases. In the UK, the Government continues to roll out more details about the £350 billion relief package.
All of this is about avoiding job losses. The more people that are unemployed means the less they are going to consume. If consumption drops, it will delay the second phase of the fiscal policy rescue package, which is the economic bounce-back.
In the US a quarter of the deal will focus on loans to businesses, to support them during this period and hopefully avoid an unnecessary increase in unemployment. President Trump is also riding to the rescue, with the possibility of a further tax cut through the suspension of trade tariffs for 90 days, which should alleviate pressure on some companies’ profit margins.
Apply. Rinse. Repeat. The same instructions that were given for the quantitative easing programme to combat the great financial crisis are being repeated for the great virus crisis. Only this time the measures being enacted are more dramatic; projections for the Federal Reserve’s balance sheet is a surge of more than $3 trillion. This will equate to an expansion of roughly 75% and is comparative to the entire stimulus injected over a decade since the global financial crisis. It is likely the current level of policy stimulus will not need to remain in place for as long as it did for the previous crisis. However, it is needed now as it was 12 years ago to prevent a global depression.
The World In A Week - Contagion
Basic evolutionary theory teaches us that adaptation is the biological mechanism by which humans adjust to changes in their environments. We find ourselves living in a period of great change, and it is those that adapt to change best that will come out on top, after the virus subsides.
In the UK, we are being urged to stay indoors and socially distance ourselves to prevent the spread of the virus further. As humans, we are experiencing significant structural reform as we adapt to our new working lifestyles and plan around the latest advice issued by the Government. Negligible commute times and a ban on outdoor social activity has created a great deal of free time for people to utilise. Governments across the world are assessing measures to restrict the economic disruption that the virus is causing.
It seems the UK’s approach has been more staggered than the rest of Europe’s with Boris briefing the nation daily by issuing more restrictions and providing further guidance. Whereas in Germany, gatherings of two or more people have been banned and illustrates a direct approach than it appears the UK are operating with. The UK are more focused with reducing their economic hit from the virus than reducing the spread of the virus and it is expected that more drastic restrictions in the UK will follow. The decision to close schools in England was made after Wales and Scotland. However, the ban for pubs, gyms and restaurants shows that Boris intends to issue more rigorous policies.
Rishi Sunak has offered £350bn in the form of loans and grants to save British businesses from insolvency and workers from redundancy. This economic response appears to be one of the most significant displayed from any major country. Germany has made available €500bn in the form of loans available to all businesses and has encouraged firms to defer their tax payments. There doesn’t appear to be a generic response, but fiscal stimulus appears to be the most popular decision taken. Hong Kong has selected a more direct stimulus and has pledged to give HK$10,000 to each citizen. However, with lock-down measures likely to be in place, this doesn’t appear to be an effective response.
The last pandemic was the swine-flu pandemic in 2009-10 which infected almost 1.4bn people globally but the death toll ranged from 151,700 to 575,500. Swine flu was more prevalent in younger people which we now know to be the opposite of COVID-19. The effect of swine flu was masked by the financial crisis of 2008. However, COVID-19 is the first pandemic to exist in the social media era where information and opinion is more readily available and is one of the major factors attributing to the high volatility of the global markets.
What we all need to appreciate is that we are living in a period of unprecedented change and we all need to be adaptive, bold and co-operative to ensure we continue to deliver to our clients.
During times of heightened market volatility, many investors feel a strong urge to de-risk and sell out of their equity positions. However, history has rewarded patient investors who stayed invested over a longer time horizon. There has never been a market drop without a subsequent rally and with equities at a major discount, this offers a suitable opportunity to top up your equity positions.
The World In A Week - Interim Update
Policymakers around the globe are turning to their fiscal armouries to meet the economic challenges that the Coronavirus is, and will be, causing. This is a welcome development and as we have written previously, central banks have all but exhausted what monetary policy can achieve.
President Trump is pushing for a stimulus package that could reportedly be as much as $1.2 trillion and UK Chancellor, Rishi Sunak, has unveiled £330 billion of state loan guarantees, with an additional £20 billion of financial handouts aimed to help businesses cope with the impact of COVID-19. These stimulus packages are looking to offset the short-run economic damage that is likely to be done from social distancing, travel bans and outright quarantines.
However, central banks still have an important role to play in this crisis. It is their role to ensure that the cost of borrowing remains low for the foreseeable future, in order that governments can do whatever is needed to overcome both the social and economic crises.
We have already seen the Federal Reserve reduce interest rates to zero in the US and our own Bank of England has pulled rates down by 0.5%. To supplement this, central banks around the world have already embarked on a fresh round of quantitative easing, buying up assets to reduce borrowing costs further and give support to the underlying economy. The European Central Bank has just announced a programme to buy €750 billion of bonds after an emergency meeting last night.
What we must remember is that this is not a repeat of the global financial crisis of 2008. 12 years ago, the great recession was caused by a collapsing housing sector and a lack of confidence in banks, meaning the risk at hand was a complete failure of the global economy. This time, the sectors that look most vulnerable are travel, tourism and retail, which combined accounts for 10% of the global economy and employ 10% of the global workforce (source: Fidelity Investment Management).
This is more akin to a natural disaster and the right thing to do in the event of an earthquake is to support those most affected by the seismic economic and social upheaval.
The World In A Week - Deciphering The Known Unknowns
Memories of what it was like during the turmoil of the global financial crisis have resurfaced, but even in the height of the tumultuous times of 2008 and 2009, the market did not have such extreme one-day movements as we have just experienced.
Last week we had two of the worst days in history of the FTSE 100 and the fall on Thursday was bigger than anything experienced during the throes of the great recession:
| 20th October 1987 | -12.2% |
| 12th March 2020 | -10.9% |
| 19th October 1987 | -10.8% |
| 10th October 2008 | -8.8% |
| 6th October 2008 | -7.9% |
| 9th March 2020 | -7.7% |
| 15th October 2008 | -7.2% |
| 26th October 1987 | -6.2% |
Source: Investment Week, SharePad/AJ Bell
In the wake of the FTSE 100’s second worst day in history, the index is continuing to fall, down over 6% at the time of writing and puncturing the 5,000-price barrier, as airlines and holiday firms feel the impact of travel bans and falling demand for flights. The accumulated combination of falls has meant the FTSE 100 is more than 30% below its 52-week high and well into what is traditionally called bear market territory.
The fear of recessionary risks that dominated the end of 2018 have returned, and the record breaking 11-year bull market in the US has ended with the S&P 500 dropping as much as 26.7% from its peak in February. The most obvious question investors are asking themselves is whether we are at the bottom.
Putting last week’s market moves into context is critical. By comparing against the three previous market corrections, namely 1987, 2000 and 2008, we can gain some perspective during these agitated times. Using the historical data of the S&P 500, the main index of US stocks, you can see that while the drops are dramatic, the subsequent recoveries do provide a remedy for the long-term investor.
| S&P 500 | Drop | Duration | Rally | Duration |
| 1987 | -34% | 3 months | 582% | 147 months |
| 2000 | -49% | 30 months | 101% | 60 months |
| 2008 | -57% | 17 months | 378% | 129 months |
Source: Bloomberg, Standard & Poor’s, J.P. Morgan Asset Management
While we expect continued disruption to economic activity, we do believe a path towards recovery does exist. Policy makers and markets will continue to act swiftly and decisively to the continually changing situation. The unpleasant truth is no one truly knows what will happen and that uncertainty is exacerbating the reactions in stock markets. However, the landscape has changed dramatically since the global financial crisis and previously unthought of solutions are now possible.
In order to avoid a repeat of the great recession, governments need to allow for unlimited fiscal compensation for lost revenues and wages to all businesses and employees affected by quarantines and lockdowns. Monetary policy is necessary to avoid financial systems collapsing, while fiscal measures, that are designed to support the recovery, should only be deployed once the virus is under control. We had our first budget from Rishi Sunak promising a record-breaking stimulus package of £30 billion to counteract the effects of the Coronavirus. Fiscal expansion is already being pushed by the Government, looking to invest in the UK economy, particularly infrastructure projects.
Central banks around the globe have acted swiftly and continue to react to an unknown environment. This morning we have seen the Federal Reserve’s Open Market Committee reduce interest rates to zero, as they realise the effects of the Coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook.
The Federal Reserve expects to maintain interest rates at zero until it is confident that the economy has weathered recent events and is back on track. What is more interesting was the Committee’s comment that as it continues to monitor the developments and implications around the globe: “…will use its tools and act as appropriate to support the economy.” This will include significant quantitative easing and increasing its own balance sheet once again.
Liquidity is being pumped into the financial system to ensure any signs of strain are bolstered and more targeted support is already primed. This would appear to be Jerome Powell’s ‘Mario Draghi’ moment, as the actions of the central bank are saying they will do whatever it takes to support markets during this unprecedented time.
The Fed’s cut was part of a co-ordinated response from the world’s central banks, with the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Canada and the Swiss National Bank all introducing measures to shore up their financial positions.
While the trigger for the market collapse has been unpredictable, it is at least simple. A market that had not seen a significant downturn in over 11 years, and was arguably over-priced on some measures, met the unknown effects of an alarming and virulent virus. Whether the remedy will be simple is another of the myriad of known unknowns that we face; what we do know is that every market collapse has been followed by a recovery.
While we wait for the signs that we are close to the bottom, which means needing to see a little more clarity and certainty, such as infection rates slowing or evidence of global containment, we need to remember our long-term goals. A pragmatic approach of long-term investing will enable investors to hold their nerve during the most turbulent of times. Rest assured, cognisant of the current market volatility, the investment team continue to execute the processes that have been tested over the past 15 years, to ensure we deliver robust outcomes to all our long-term investors.
The World In A Week - Corona Crash
Global equity markets saw an increase in volatility last week amid mounting fears of a global pandemic. The MSCI ACWI and the S&P 500 saw the most violent swings, both indices were in positive territory midweek but fell by -1.53% and -1.36% respectively in Sterling terms at market close on Friday. The FTSE All-Share finished the week down -1.77%. In the current environment, investors shifted assets into safe havens such as gold and government bonds.
Slowing global growth continues to be the main concern for markets as the spread of the Coronavirus shows no signs of abating. The OECD and the IMF have revised down their growth figures and the Fed have responded by cutting interest rates between FOMC meetings, which is unusual. The ECB and the Bank of Japan believe they are sufficiently equipped to cope with a financial crisis and are in a position to act.
Unsurprisingly, data continues to show signs of weakening; China’s PMI dropped markedly to 40.3, significantly below estimates of 45.7 and the lowest reading since the survey was launched in 2004. PMI readings below 50 indicate contraction, and while data elsewhere remains reasonably stable, we believe that the impact will start to be felt outside of the Asia region in the coming months with contagion spreading to developed markets.
Moving away from global equity markets to US politics; Biden’s popularity surged in ten Super Tuesday states including Texas last week, reinvigorating his bid to become the Democratic Party candidate. Super Tuesday is the name given to the US presidential primary election day in February and March, when the greatest number of US states hold primary elections.
Biden’s victory sparked the usual derogatory rhetoric from Trump, but we expect the election will be a much closer contest if Trump’s opponent is one with more moderate political views, which, if Biden is victorious over Sanders, would certainly be the case. The real campaigning begins in the summer, which may allow the media to put something else in the headlines and ,hopefully, put the Coronavirus to bed.
The World In A Week - Planes, Trains And Automobiles
It was media heaven last week as the headlines screamed about the worst week for investors since the global financial crisis in 2008. The Coronavirus has encapsulated the fears of investors; like the disease, they fear the spread and fallout in markets will ultimately lead to the next recession.
Policymakers around the world look to grapple with the consequences of transport and supply chain disruptions resulting from efforts to contain the outbreak. A degree of forbearance is needed for companies who have been affected the most from the global supply chain disruption. It is important that any policy response needs to be granular and specific, as the previous blunt tool of interest rates cuts will arguably not be sufficient in this instance.
The Federal Reserve is still the world’s most influential central bank and last Friday Jerome Powell issued a statement that has set expectations for resumption of interest rate cuts in the US. At the beginning of the year, the markets were pricing in just one interest rate cut in the US; this has now increased to three and will probably mean a rare cut during a presidential election.
In situations like this, the best cognitive course of action is to think of the extreme outcomes that may arise. There are two possible consequences from the Coronavirus outbreak: either it ends up being the pin to burst the economic expansion or it acts as a pump to prime the next wave of stimulus.
We would expect markets to continue to be volatile until the spread of the virus is brought under control and there are tentative signs that this is already happening. For investors, now is the time to hold your nerve and not be tempted into a knee-jerk reaction of selling your long-term investments in reaction to short-term market mayhem.