Weekly Market Update : 16th – 22nd March

Extreme volatility persisted last week, with stocks declining sharply as the number of coronavirus cases globally continued to rise.

The effects of social distancing have taken a significant toll on the global economy, hurt employment, and major central banks and governments around the world announced measures to support the economy.

European countries announced a combined $1 trillion in new fiscal spending and the U.S called for a $1.2 trillion stimulus plan. The Federal Reserve cut rates by a full 1%, returning its policy rate back near zero in addition to restarting its bond-buying program.

As of 12pm London time on Friday, UK equities had fallen 4.1%, with most of the pain being experienced within mid and small-cap companies, with the UK mid-cap index falling 11.7% versus 1.9% for large-cap companies. Japanese equities rose 1.7% as the Bank of Japan announced that it would double its purchases of Japanese equities through exchange-traded funds to 12 trillion Yen a year, equivalent to $112 billion.

US equities experienced their single largest day loss since the crash of October 1987. US equities were down 11.1%, however, in Sterling terms, US equities were down 5.5%, as the US dollar appreciated dramatically against most currencies amidst a dollar funding squeeze. European equities were down 1.6% over the week, although in Sterling terms, they have actually risen 0.4% as Sterling came under pressure against most major currencies this week.

The Japanese market was further boosted by rising expectations for fiscal support from the Japanese government. However, for Australian equities, exposed to financial and mining stocks, the market fell 13.1% over the week. Emerging markets dropped 14%, with China and Hong Kong remaining relatively defensive, falling 4.9% and 5.1% respectively. India fell 12.3% and Brazil lost 17.4%, with the latter being hit particularly badly from a further collapse in the oil price during the week.

It was also a difficult week for defensive assets, despite the Federal Reserve enacting an emergency interest rate cut of 1% on Sunday, taking rates to a range of 0% to 0.25%. The stress came from a US dollar squeeze, as demand spiked from countries and companies funded in dollars to keep themselves financed. This culminated in liquidity drying up, as investors increasingly turned to their most liquid assets as cash was required, leading to a selloff in government bonds and, once again, gold.

Yields, which move inversely to price, on 10-year US Treasuries rose to a peak of 1.26% on Thursday, having traded as low as 0.65% at the beginning of the week, whilst UK Gilts went from a yield of 0.40% to 1.01%, and German bunds swung from minus 0.58% to minus 0.15% over the same period. The government bond market started to behave more normally as the US Federal Reserve announced on Thursday that it would open up US dollar swap lines with more central banks globally.

This coincided with the Bank of England cutting interest rates to 0.1% and expanding its bond-buying programme by £200bn, and the European Central Bank announcing a plan to buy $750bn of bonds. This led to government bonds rallying, with 10-year yields on US Treasuries falling to 1.01% by Friday, with German Bunds trading at minus 0.28% and UK Gilts 0.58%. Similarly, the gold price fell from $1,560 an ounce on Monday, to $1,451 at its lowest point on the same day, before clawing back some of those losses during wild durations over the remainder of the week, and now currently trading at $1,507 an ounce.