It’s been a week of carnage in markets as the global COV-19 pandemic has driven the biggest percentage fall in the S&P500 since the 1987 crash. Over the last week, US equity markets have fallen by around 18%; European stocks are down by 24% while the ASX has fallen 17%. Clearly a number of factors have been present.
There are now 134k confirmed coronavirus cases around the world and almost 5,000 deaths have been recorded due to the virus. Europe has seen the strongest growth in cases this last week with a close to 15k increase; however, cases in the US are set to rise materially in the weeks ahead, having increased by 1200 over the last 5 days.
Action to control the virus has had a potent impact on market sentiment. Sporting events around the world have either been cancelled or will be played without fans. Italy took the incredible steps of closing all shops except grocery stores and pharmacies. France has closed all schools and universities and in a troubling address to the nation, Trump announced a Europe US travel ban in a belated attempt to prevent the spread of what he called a “foreign virus”.
Trump was forced to later clarify that “trade will in no way be affected by the restrictions” after suggesting in his address that “anything coming from Europe is what we are discussing”. However, the damage was done and global equity markets went into a tailspin.
Over and above the coronavirus, we have also seen a crude oil price war break out between Russia and Saudi Arabia. At the OPEC and OPEC+ meetings last week, markets had expected OPEC to announce an extension of current production caps and also agree further cuts in the region of 750k.
There was no agreement to do anything last week and over the weekend, Saudi slashed crude prices and announced a sharp increase in production. Saudi production averaged 9.9mbpd through Q4 last year; Saudi Aramco this week announced plans to increase production to 13mb while the UAE will take its production from 3 to 4mbpd.
In the face of a collapse in demand for crude due to travel restrictions/ bans, an OPEC price war has had a huge impact on crude prices. From the highs seen in Jan this year when Trump ordered the assassination of Iranian General Soleimani, the US benchmark WTI has fallen by 50%. While this is good news for consumers, it has increased pressure on emerging market economies, high yield debt markets and energy producers.
Central banks have been quick to respond to the carnage in global markets. Over the last two weeks we have seen an emergency 50bps cut by the Federal Reserve; and emergency 50bps from the BoE; 50bps from the Bank of Canada and 25bps from the RBA.
The ECB last night announced a new refinancing facility; a new targeted funding facility and an additional EUR120bn of asset purchases focussed on the private sector. On top of this, both the Bank of England and ECB relaxed capital and liquidity buffers, to provide increased lending capabilities in these very troubled times.
The Fed also last night threw “trillions of dollars” at funding markets. In the face of this enormous wave of liquidity, it is indeed concerning that global markets have fallen as much and as quickly as they have.
As Lagarde emphasised very clearly at the ECB press conference last night, it should be up to Governments to come up with an “ambitious and collective fiscal response” and it’s probably fair to argue that to date we have seen no real signs of a collective response from G7 governments.
Here in Australia, the Government has announced a bold Fiscal Stimulus Package to bolster the economy’s defences against the damage that will be wrought by COVID–19. The stimulus package is valued at $22.9bn over the three years 2019/20 to 2022/23, representing 0.4% of GDP over this period.
However, ahead of the announcement, Westpac’s chief economist Bill Evans argued that Australia will enter a technical recession in the first half of 2020. And despite the Governments bold efforts, that forecast has not changed.
Now next week sees regular policy meetings from the Fed and BoJ on Wed and Thurs and the Fed is fully priced to deliver another 75bps of cuts on top of the emergency 50bps last week. The A$ has made fresh post GFC lows this week and gains should be limited ahead of the RBA minutes on Tuesday and the employment report Thursday next week.
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