The World Health Organisation declared the novel coronavirus a pandemic this week and complained about “global inaction” in the face of the threat. But if some governments appeared complacent, investors seemed closer to panic. Markets began the week with their biggest one-day falls since 2008 and ended it with their steepest slide since the 1980s. In the US, the S&P 500 was down 16.5% by Thursday’s close. In the UK, the FTSE 100 lost 19% while the FTSE World Europe ex UK index was down 19.5%.
The scale of the sell-off – with some indices suffering their worst-ever one-day falls on Thursday – signalled the end of the longest bull market in history and an abrupt slide into the jaws of the bear. A bear market is defined as a 20% fall from a previous peak. This bear has arrived with unprecedented speed and savagery, and is ominous for another reason: 11 out of the past 13 bear markets have signalled a recession. This time, however, the causes of the shock are very different.
As fears about the virus’s impact grew, Italy’s government put the whole country into lockdown (also responding with a €25bn fiscal stimulus programme), and Ireland and France closed all schools and universities. In the UK, the government announced that it had moved from “containment” to “delay” in its response to the virus, with the possibility of more stringent measures to follow. Meanwhile, President Trump banned flights from the European Union to the US.
Central banks step in
The world’s central banks responded to the escalating crisis with a slew of rate cuts while governments continued to loosen their purse strings. The Bank of England cut its benchmark rate by 50 basis points, returning it to its lowest-ever level, and announced additional lending to support smaller businesses. On Wednesday, the UK’s new Chancellor of the Exchequer, Rishi Sunak, announced a Budget containing £12 billion in stimulus measures.
In the US, the New York branch of the Federal Reserve (Fed) announced that it would inject $1.5 trillion into the financial system through three successive tranches of short-term loans. Expectations grew that the Fed would soon cut interest rates to zero.
The European Central Bank (ECB) expanded its programme of quantitative easing on Thursday, announcing an additional €120 billion in bond purchases. It also announced new lending to banks and more generous terms for its existing loans. But bond investors were unsettled when Christine Lagarde, the ECB’s president, said that supporting the bond markets was not the ECB’s job. Italian bond yields spiked in response.
Global central banks will still have to worry about market liquidity. Despite the turmoil in equity markets on Thursday, traditional ‘safe haven’ assets such as US Treasuries and gold did not behave as expected; the gold price actually fell 3.6% on Thursday. As investors reached for liquidity, they disposed of easy-to-sell assets and caused dislocation in the Treasury markets. Even in the more liquid areas of emerging markets, obtaining asset prices was more difficult.
The availability of US dollars remains critical to the global financial system – the high likelihood is that the Fed will have to continue to pump money into the system to ensure a supply of the world’s reserve currency. Markets are pricing in further rate cuts, with a restart of quantitative easing almost inevitable unless the pandemic eases. It’s not all bad news though – the rate of new infections in China has slowed significantly.
Saudi turns on the taps
Further unsettling investors over the week was a plunge in the oil price. This followed Saudi Arabia’s decision to ramp up oil production after a production-cutting agreement between Russia and OPEC collapsed. The price war is likely to hurt Saudi Arabia’s OPEC allies at least as much as Russia, however. News of the US travel ban sent the oil price still lower on Thursday, with Brent crude falling to around $34 a barrel. That represents a fall of around 50% since January.
The new US restrictions on European flights compounded the woes of the world’s airlines. Air companies including Qantas, Norwegian Airlines, American Airlines and Delta had already cut flights or abandoned guidance earlier in the week. The US ban drove the share prices in the battered sector down further still. Some European airlines have lost well over half their value since the start of the coronavirus outbreak.
Perhaps surprisingly, given all the market turmoil, there was a healthy amount of corporate activity during the week. Tesco disposed of its Asian business to Thai company Charoen Pokphand for more than $10 billion. The move should allow Tesco to return more than $6 billion to its shareholders. Meanwhile, Aon announced that it would buy Willis Towers Watson for $30 billion, and PepsiCo said that it would buy energy-drink firm Rockstar for $4 billion.
And finally …
As Italy comes to terms with life under lockdown, it’s worth noting that Italians – or rather Venetians – invented the very concept of quarantine. This arose as Venice sought to combat the bubonic plague.
The term comes from the Italian phrase quaranta giorni, or “40 days”. That was the time that the Venetian authorities deemed necessary for ships to wait off its shores if they had come from plague-stricken countries. The rule, first enforced in the fifteenth century, proved effective in ensuring that ships were not carrying unsuspected infections.
Let’s hope that Italy’s current measures prove equally effective.