This week, the strongest market rally since the 1930s has followed the steepest, fastest slump in equities, leaving many to wonder where we are on the COVID-19 crisis.
It is important to realise however, that equities (and risk markets in general) will require two things to become durably positive:
- Confidence that the spread of the virus has been halted and that there is a visible end to the strict containment measures in most countries
- Confidence that the massive hit to the global economy will be short-lived.
Stocks hit a low point on Monday, as expectations rose for the United States to follow other developed economies, including France, Germany, Italy and the UK, in delivering a huge fiscal stimulus package, worth as much as $2 trillion. This dwarfs the $800 billion rescue package delivered during the financial crisis of 2008/09. Whilst central banks have tackled illiquidity in markets, governments have increasingly stepped up to the plate with fiscal support, designed to plug the sudden stop in economic activity, as countries adopt social distancing measures to counteract the coronavirus.
On Tuesday, the US Dow Jones index, which measures the share prices of 30 of the largest US companies, had its biggest one day rally since 1933, during the Great Depression, rising by 11.4%. In this week, the US Federal Reserve also pledged to buy an unlimited amount of US government bonds to act as back stop for the US investment-grade corporate bond market. US jobless claims surged by over 3 million, to a record 3.3m, and the US overtook China as the country with the largest number of coronavirus infections. Figures out of China on Friday showed a near 40% fall in industrial profits to the end of February, a drop of almost $60 billion.
Bear market rally or has a low point been reached?
As of 12pm London time on Friday, US equities have risen by 14.1% over the week, European shares rose 5.8%, with the UK market climbing 6.9%. Japanese shares rose 13.7%, whilst Australia’s gains for the week were all but wiped out on Friday, as Australian shares gained 0.5% over the week, as the rally in markets showed signs of petering out. Emerging markets increased by 6.0%, with South Korea returning 9.7%, whilst Indian shares fell 0.3%, having collapsed by 13% on Monday, their worst day on record, just ahead of Prime Minister Modi announcing a lockdown on its population of 1.3 billion people for twenty-one days.
As the US Federal Reserve, European Central Bank and the Bank of England, amongst others, pledged to buy bonds and provide liquidity, some semblance of normality returned to haven assets as government bonds rallied. The yield on 10-year US Treasuries, which moves inversely to price, fell to 0.78%, German bunds rallied to minus 0.45% and UK gilts 0.36%. The gold price, which has been buffeted by investors desperate for liquidity, rose by 10.1%, now trading at $1,638 an ounce. The US dollar, which appreciates as global liquidity dries up, eased this week, as it fell by 2.6% and 5.1% versus the Euro and Sterling, now trading at $1.10 and $1.22 respectively, having fallen beneath $.1.15 versus Sterling on Monday.
The bottom line is that we are further along to the end of this bear market, and the other side of the crisis could be very positive for risk assets, but we still need to be vigilant about the virus fallout and cannot sound the all-clear yet. We are nevertheless convinced that the massive economic damage will be mitigated by governments and central banks worldwide, and that it’s only progress on the virus itself that is holding markets back. When this crisis is over, we could well see another long-term bull market in equities and the opportunities will be rife.