Coronavirus: 17 March investment update

The markets’ then shifted their focus towards policy responses for COVID-19, and the UK got the ball rolling well with a coordinated Bank of England interest rate cut and the UK Budget, which aimed to deliver a fiscal boost to the UK economy.

Trump delayed his announcements on COVID-19 (which he had previously called a hoax), and when he did markets saw him as being blasé towards the crisis, while the Schengen area travel ban added to a sense of panic. This apparent lack of US leadership spooked the markets, which then dropped sharply.

The next day it was the ECB chair Christine Lagarde’s turn to disappoint. Although there were some well-targeted Quantitative Easing (QE) and liquidity measures, she made the error of stating that the ECB does not exist to narrow sovereign credit spreads which led Italian spreads to widen quickly.

Then the World Health Organization officially declared that COVID-19 is now a global pandemic.

On Friday, after European markets closed, Trump gave another speech declaring a national emergency and outlining various federal government initiatives aimed at starting to get a grip on the crisis.

Over the weekend of 14/15 March, the Federal Reserve (Fed) cut interest rates to near zero, announcing a US$700bn bond buying program, extending the discount bank borrowing window to 90 days, cutting reserve requirements and extending big dollar swap lines with other key central banks. That was all about keeping bank lending markets open to support vulnerable businesses.

COVID-19 is not a traditional macroeconomic event.  Its impact on the economy is going to be quite severe, squeezing both demand and supply chains.  Central banks can’t ‘solve’ this just by bringing back QE and cutting interest rates, even though it boosts liquidity and bank lending. What is also needed is globally-coordinated fiscal intervention carefully targeted at certain industries, vulnerable small businesses and individuals through this downturn, and we are starting to see that, with more to come.

The markets, meanwhile, are really struggling to price in this crisis and there is a lot of distress. We first started to see that on Thursday 12 March, when many equity markets fell the best part of 10%. With the exception of only the highest quality sovereign bonds (e.g. US treasuries, German bunds) everything fell sharply in value. Even gold was down about 4% and there were stories of overly leveraged investors selling it to cover margin calls and liquidity requirements.

Looking at a snapshot, admittedly taken at the darkest hour and before Friday’s late surge, global equity markets were down over just four days by -16.8% in USD terms and -14.2% in GBP. Year-to-date, they are down -24% in USD and -20.1% in GBP, as at the time of writing. Over the week, the best markets were global emerging markets, Asia and Japan. Europe (-21%) and the UK (-22%) were hit hard.

By late Thursday, credit spreads were widening sharply and even our investment trust alternatives were starting to come under pressure given some investors were trying to get liquidity wherever they could find it.