Stock markets around the world are currently suffering a major period of volatility as a result of the COVID-19 outbreak. We are in unchartered territory. At this point it’s impossible to pinpoint the full economic impact as activity grinds to a halt in several sectors.
The IMF (International Monetary Fund) have issued a series of measured responses to the outbreak, one of which cites: Quantifying the economic impact is complex, giving rise to significant uncertainty about the economic outlook and the associated downside risks. Such an abrupt rise in uncertainty can put both economic growth and financial stability at risk. In addition to targeted economic policies and fiscal measures, the right monetary and financial stability policies will be vital to help buttress the global economy.
Central banks are moving to stabilise the financial system by ensuring that there is enough liquidity to keep banks and financial markets functioning, thereby supporting businesses and households during this current downturn.
The IMF also stands ready to lend up to $1tn as it encourages governments to protect their economies from COVID-19. The IMF also announced it would make available $50bn to emerging and developing economies through various emergency financing programmes.
The continent has so far been very badly impacted by the outbreak, with Italy at the epicentre. COVID-19 fears have fuelled a sharp sell-off in equity markets as EU leaders move to adopt a unified fiscal response. Many countries are now on lockdown.
Before the outbreak, data for the 19-country Eurozone revealed a lacklustre end to 2019, with growth across the whole bloc slowing almost to a halt after the French and Italian economies unexpectedly contracted during the final quarter of last year. The German economy also endured another weak performance in the October-December period: although Europe’s largest economy did see some expansion, growth was rounded down to 0.0% with the sluggish performance reflecting a fall in exports.
Latest statistics released at the start of March indicated the Swiss economy should gain some momentum this year, supported by solid domestic demand. However, threats to this outlook include a resurgence of trade tensions, COVID-19 uncertainty and strained Swiss-EU relations. GDP projections predict growth of 1.2% in 2020 and 1.3% in 2021. In January, retail sales declined and manufacturing PMI dipped. Weaker foreign demand prospects can be linked to the outbreak.
On Budget day in the UK, both the Chancellor, Rishi Sunak, and the outgoing Chairman of the Bank of England (BoE), Mark Carney, were keen to emphasise the temporary nature of the economic downturn. The newly appointed Chancellor also stressed his firm belief in the British economy to weather the storm. Taking an empathetic tone, he reassured the British public that’s we will get through this together and called on all parties across the House to support his 30bn fiscal stimulus, including welfare and business support, to keep this country and our people healthy and financially secure. Further announcements have bolstered this initial pledge of support.
On the morning of the Budget, the BoE had announced an emergency cut in interest rates to support the economy amid the COVID-19 outbreak. The BoE base rate was reduced from 0.75% to 0.25%, returning it to its lowest level in history. The BoE said it would also free up billions of pounds of extra lending to help banks support firms. Mr Sunak also revealed that, not taking into account the impact of COVID-19, the British economy is forecast to grow 1.1% this year, then 1.8% in 2021-22, 1.5% in 2022-23 and 1.3% in 2023-24, while inflation is forecast to be 1.4% this year, increasing to 1.8% in 2021-2022. Borrowing as a percentage of GDP will be 2.1% this year, rising to 2.4% in 2020-21 and 2.8% in 2021-22.
UK markets have been badly impacted. The UK government has announced a set of financial measures to help the UK economy tackle the impact of the virus, which will hopefully bring some confidence back to financial markets.
In the US, the Federal Reserve announced an emergency rate cut of 50 basis points in early March, followed by a further cut of 100 basis points on March 15. The Fed have also announced several other measures. Which include a new quantitative easing (QE) program of at least $700bn commencing 16 March.
Supply chain issues are coming to the fore, particularly for technology companies, as highlighted by a warning from Apple that it will fail to meet its quarterly revenue target as factories in China are closed. Mastercard, Microsoft and PayPal also issued similar supply chain related warnings.
Prior to the outbreak, GDP figures released by the Bureau of Economic Analysis showed that US growth remained at a respectable level. The world’s largest economy grew at an annualised pace of 2.1% during Q4 2019, identical to the rate recorded during the preceding quarter and exactly in line with analysts expectations. Although the US economy saw growth at a reasonable rate, the level remains significantly below President Trump’s lofty prediction of at least 3% annual growth made after his tax cut announcement in 2017. Economists believe the latest statistics confirm a broader trend towards steady but decelerating growth rates that has been evident over the past year.
Asia and emerging market equities
The Chinese economy virtually came to a standstill in February, despite this equity markets proved resilient. In general, Asian equity markets have weakened as the virus accelerated, raising concerns over the potential impact on global economic growth. Interest rates have been cut in in several emerging market countries. Preliminary GDP estimates released by the Japanese government show that Japan’s economy shrank by 1.6% during Q4 2019, the country’s largest quarterly contraction in five years. While official data released by the National Bureau of Statistics also confirmed China’s rate of growth remains on a downward trajectory.
Gold is currently trading at around $1,516 a troy ounce. The outbreak has impacted demand for raw materials. A combination of slowing global growth, investors reducing exposure to risk and accommodative monetary policy could provide a level of support to the gold price long-term. A host of stimulus measures also provided some support to the precious metal. Brent crude is currently trading at around $29 a barrel. Worldwide, refineries are slowing output and contemplating extensive maintenance due to travel restrictions put in place in response to the pandemic. Gasoline demand in the US, the world’s largest oil consumer, is falling. International flights are being grounded worldwide, removing jet fuel demand.
Although markets do not respond well to periods of uncertainty, what is certain is that volatility goes hand in hand with stock market investment; and while market movements can be concerning, we have all become much better at expecting the unexpected, experience has taught us that.
Instead of being overly worried by volatility, the best strategy is to be prepared. A well-defined investment plan, tailored to your objectives, in line with your attitude to risk, that takes into account your financial situation, can help you weather short-term market fluctuations. Market volatility is a timely reminder to keep your investments under regular review that’s what we do.
We aim to manage the inherent volatility of markets, so your savings have the best chance of growing for the future without giving you sleepless nights and whilst ensuring you aren’t taking too much, or too little risk, with your money.
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