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Ok. Got itThe S&P 500 declined by 12,4% over the month, although this hides some of the biggest daily drawdowns since the global financial crisis. Read our latest market review.
Highly contagious
What started off as growing concerns in February, escalated to a worldwide health crisis in March. Countries like Italy and Spain clearly highlighted the severe impact of the pandemic and, therefore, the urgency of flattening the curve through hygiene control and social distancing. Risk off I spread across financial markets as it became more evident that much of the world would eventually go into lockdown. The moves in major markets were swift, brutal and echoed the volatility of major historic market crises. No region or market was spared, as contagion spread across the globe. Even traditional safe havens did not hold up, with cash and more specifically USD cash, the only place to hide.
The S&P 500 declined by -12.4% over the month, although this hides some of the biggest daily drawdowns since the Global Financial Crisis. The MSCI World Index ended the month down -13.2%, while emerging markets and currencies experienced significant losses as risk appetite diminished. Global measures of volatility spiked to historic levels as uncertainty put a dampener on confidence.
Global bond markets initially benefitted from the flight to safety and central bank stimulus, but still ended the month down with the Barclays Global Aggregate Index declining -2.2% over the month. With near-term earnings under pressure, credit markets weakened as solvency risk increased and credit ratings agencies downgraded the most exposed countries and companies.
OPEC minus
In early March, OPEC+ leader Russia, rejected a request from OPEC to cut oil production, instead seeking increased market share in a market where US shale producers have disrupted supply dynamics. Saudi Arabia raised the stakes by announcing an increase in output at significant price discounts, bringing with it the real threat of an all-out price war. With global demand under threat as air and land travel ground to a halt, the standoff between Russia and Saudi Arabia resulted in an oil price decline of more than 30%.
At nearer $30 a barrel, the oil price has continued to languish at levels much lower than the cost of production for marginal producers. This will be unsustainable for most producers, including the US shale drillers, many of which have high levels of debt. Casualties are likely and by the start of April, US shale producer, Whiting Petroleum Corp filed for Chapter 11 bankruptcy. Although the health crisis has not progressed to a financial or credit crisis as yet, the energy sector represents a particularly vulnerable first domino.
Lockdown
In early March, the World Health Organisation declared the Covid-19 outbreak a global pandemic. By the end of March, much of the world was in lockdown. Although there are tentative signs that the increase in daily infections in Italy is moderating and daily activity in China is slowly returning, for many other countries, this is only the start. The US, a bellwether for global growth, has now become the epicentre of this pandemic, with an infection rate progressing rapidly.
A global recession is expected, the severity and extent of which will largely depend on the duration of the health crises and the ability of governments to lend support. With much of the world’s interest rates near zero, the emphasis has been on fiscal policy. Countries across the world, including Europe and the UK have announced fiscal measures. The US approved an economic stabilisation package worth $2 trillion (circa 10% of GDP), the largest in US history. This includes so-called ‘helicopter money’ or direct payments to citizens. Few other countries are able to offer similar fiscal support, and the most vulnerable have turned to the IMF and World Bank for funding. Time will tell how deep the world’s pockets are.
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