Market UpdateMarch 26 2020

Market Update: 26 March 2020

4 mins read

StJohn Gardner

Chief Investment Officer

I write this week from the kitchen table of my partner’s cottage in the country, having escaped the prospect of sitting in a London flat, on my own, for three weeks, whilst park authorities deliberate whether to follow the National Trust and close London’s few open spaces in which I might keep fit, due to the irresponsible actions of a few, and whilst building work noise, unabated by the measures, continues to disrupt my working from home. The message of social distancing is gradually getting through to the large majority of the UK population, with most getting used to the new ‘modus operandi’, having observed, on television, how the Italian public are acting in the face of the pandemic.

The last week has seen an acceleration in the death and contagion rates in Spain, France, the US and UK, yet conversely, there are very early signs the Italian figures are beginning to slow. Globally, and primarily due to containment successes in China, Japan and South Korea, the 2-day average percentage increase of those with the virus, is 15.2%. This is the lowest for a week and down from a high of 24.5% on Friday and Saturday, albeit this is hugely unreliable as a statistic as it depends on countries testing criteria which itself is still evolving. Being based on a couple of better days only, we await a more prolonged improving trend before taking any comfort from the measures Italy adopted and which are being replicated to varying degrees by other western governments.

The lock down measures taken have naturally led to a significant deterioration in activity, which was highlighted today in initial economic data releases for March showing that Purchasing Manager Indices (a barometer of the prevailing direction of economic trends in the manufacturing and service sectors) fell dramatically across Europe and the US. The data confirms impending recessions, in particular with respect to services activity.

Facing the enormous economic consequences of the unprecedented decisions to lock down significant elements of their economies, some of the most comprehensive fiscal measures ever seen in peacetime have been rolled out these last few days to cushion the impact on households, employees and businesses. On Wednesday, the White House struck a deal with Senate Democrats and Republicans on a stimulus package of more than $2 trillion in spending and tax breaks, a permanent fiscal expansion worth up to 5% of GDP. This comes hot on the heels of similar measures announced in the UK and some European nations.

In tandem, and to stem the severity of the consequential market sell-off, the world’s major central banks have reacted with promises of enormous expansion of their balance sheets, in order to maintain a stable, functioning global financial system. In the US, the combination of fiscal measures and new lending facilities announced by the Federal Reserve could channel up to $6 trillion in temporary financing. Whether intended or not, central banks’ actions have effectively monetised the fiscal effort as well as providing the liquidity to allow businesses and institutions to sell assets and prepare cash war chests for those upcoming liabilities they may no longer be able to finance from trading income.

As a result, asset prices have been volatile over the past week, but sterling weakness has cushioned the declines for UK investors and for now there are signs of stress easing in the credit markets. Certainly Tuesday and Wednesday witnessed strong gains as UK, US and Asian markets responded to the newly announced US stimulus.

In the bond markets, US Treasury yields seem near what looks like a natural bottom, unless the Federal Reserve changes its mind and follows Europe with negative interest rates. German government bond yields may also be bottoming out given the fiscal packages being discussed there.

Whilst we hope history might guide us in calling the turning points, no two crises are alike and we have not encountered one of this nature since the Spanish Flu epidemic in 1917, and of course, its impact on the economy cannot easily be split out from the influences of the tail end of the First World War. We now know SARS and Swine Flu etc. to be very minor in comparison, and that this time there has been huge government intervention. So there is little we can draw from history with regard to the potential trajectory of GDP, and hence income and value creation in our societies, let alone what the right asset values are.

Some chartists are now calling the market bottom given the markets no longer appear to be in freefall. Most equity indices have encountered drawdown levels associated with the turning points of some previous crises. Whether the enormous and coordinated policy response will be enough to support markets on a more sustainable basis, thereby leaving the trough behind us, is by no means easy to gauge. I suspect we will need to wait for more evidence of the plateauing of the epidemic curves, and some clarity on the degree of damage inflicted on the economies by the lockdown, before the markets can climb the slopes of recovery. The market rises that have followed key announcements have often petered out as the positive news is quickly usurped by the death toll data and the stark realisation of the sudden and deep knock on impacts of shutting down elements of business / trading chains.

Nevertheless, I am confident that there is a glimmer of light at the end of the tunnel and that predictions of what the world might look like as we emerge from the pandemic, will begin to be calculable with a little more certainty as the next week or two unfold.