Market Commentary 18th March 2020 from Charlie Hancock

Posted by melaniebond
Market Commentary 18th March 2020
Equity Indices
The FTSE 100 declined by 16.97% during a torrid week for markets around the globe. The FTSE 250 suffered a similar decline of 16.99%.

With Covid-19 coronavirus dominating the headlines throughout the week, investors became increasingly concerned about the economic impact of the virus.

In addition to coronavirus related concerns, investors were trying to assess the impact of a disagreement between Saudi Arabia and Russia over the production of oil. Saudi Arabia’s decision to ramp up production resulted in the oil price plummeting. Royal Dutch Shell and BP saw their share prices decline across the week, by 32.08% and 30.09% respectively. Given the heavy weighting of these stocks within the FTSE 100, the index was dragged down significantly.

European equity markets were also in the doldrums, with the broad FTSE All World Index – Europe ex UK falling by -20.05% and Germany’s DAX index declining by 20.01%.

With Italy being placed on lockdown to curb the spread of Covid-19 and other European countries reporting rising numbers, European equities were sold off heavily during the week.

European indices posted record losses on Thursday following a speech from the ECB Governor, Christine Lagarde. The ECB did not cut interest rates and called on member states to combat the economic slowdown with fiscal stimulus. The decision by President Trump to announce a ban on travel to Europe for 30 days also fuelled the sell-off in European equities.

US equity indices declined heavily throughout the week before a slight recovery on Friday. The S&P 500 index ended the week down by 8.79%, with the Dow Jones Industrial Average declining by 10.36%.

US equities were highly volatile last week, officially entering bear market territory (i.e. a 20% drop from the recent peak) on Thursday. The S&P 500 and the Dow both suffered their worst day since ‘Black Monday’ in the autumn of 1987. Investors were unnerved by the announcement of a travel ban by President Trump, with the US authorities failing to deliver a medical or economic response which could calm investor fears.

With the dispute between Saudi Arabia and Russia causing the oil price to decline sharply, oil stocks suffered heavy losses. Exxon Mobil Corporation saw their share price fall by 20.09% across the week.

Asian markets also suffered sharp falls last week, however, the Chinese market held up relatively well as the number of new cases being reported in mainland China continued to fall. The broad FTSE All World Index – Asia Pacific declined by 12.96%. Japan’s Nikkei 225 index fell by 15.99% and China’s Shanghai Composite Index lost 4.85%.

With the spread of coronavirus only taking hold in other countries in recent weeks, China is one of the few areas where the impact of the virus can be seen in the economic data. Industrial production declined 13.5% during February in comparison to the previous year, with retail sales falling by 20.5%.

Bond Yields
Gilt yields rose last week, with the 10-Year climbing to 0.41% from 0.23% at the beginning of the week. A surprise interest rate cut of 0.50% by the Bank of England did not offset the impact of Chancellor Rishi Sunak’s budget on Wednesday, which confirmed fiscal stimulus measures of more than £30bn. Significant fiscal stimulus typically causes government borrowing costs to rise.
Government bond yields in Europe rose last week, particularly in Italy where investors are concerned about the public purse becoming increasingly strained over the coming months. The 10-Year Italian government bond yield rose from 1.07% to 1.79%. The 10-Year German Bund yield climbed from -0.73% to -0.58%.

Whilst investors typically seek the safe haven of government debt in times of market stress, some analysts believe that liquidity concerns are forcing investors to sell government bonds across the globe. With government debt from issuers such as Germany being highly liquid, traders are selling these assets to release cash, which causes the yield to climb.

The 10-Year Treasury yield also rose last week, from 0.74% to 0.94%.

Treasury yields climbed upwards as investors chose to sell Treasuries in vast quantities. Analysts speculated that this was the result of both profit taking following the extraordinary rise in Treasury prices in recent weeks and liquidity issues forcing investors to sell their more liquid holdings.

GBP / USD – Current 1.2278 Previous 1.3048

GBP / EUR – Current 1.1057 Previous 1.1563

The Pound lost ground last week, with the announcement of an emergency rate cut by the Bank of England causing the UK currency to weaken. The pound fell by 5.9% against the US Dollar and 4.38% against the Euro.

Gold prices declined last week by 8.67% to reach $1,530 per ounce. Gold typically performs well during periods of market stress, however, as with government bonds, investors were selling the highly liquid precious metal last week, causing the price to fall.
The price of Brent crude slid by 25% last week to reach around $34 per barrel.

In recent months, OPEC nations have been limiting production in order to support wholesale oil prices. Following Russia’s decision at the start of the month to stop lowering their output, Saudi Arabia announced on Saturday the 7th March that they would discount their oil prices and raise production significantly. As a result, oil prices slumped on Monday before gradually falling further throughout the rest of the week.