It was another volatile week for markets, with central banks cutting interest rates in a bid to calm markets amidst the global spread of Covid-19. Equity markets swung from one extreme to the other throughout the week, whilst safe haven assets including the 10-year US Treasury rallied strongly with yields reaching historic lows.
Market moves dominated by Covid-19
Investor sentiment this week was torn between the announcement of further loose monetary policy versus the accelerated spread of the virus across much of Europe, UK and now the US. Markets got off to a good start on Monday, with the US market rebounding up 4.6% in anticipation of an interest rate cut by the Federal Reserve (Fed). However, almost all of the gains were given up as gloom surrounding the fallout from the virus swamped the positive impact of an emergency 50 basis point Fed rate cut made on Tuesday.
In anticipation of a likely slowdown in their economies, central banks in Australia, Canada and Malaysia also cut their interest rates this week, whilst the Bank of Japan injected liquidity into the country’s financial system. As well as monetary responses, governments have also promised spending and fiscal initiatives to tackle the spread of the virus. For instance, in the US, the House of Representatives passed an $8bn funding package, which provides more than $3 billion in vaccine research and $2.2 billion in prevention. The deal now moves to the Senate and is also expected to be passed.
Overall, as of 12pm London time, the US is up 2.36%, though futures imply a drop in markets later this afternoon. European markets fared worse, down 2.21%, and the UK market is lower by 1.7%. Meanwhile Italian equities, where there are the highest number of Coronavirus cases in Europe, are down 5.34%. Likewise, in Asia, Japanese and Australian equities struggled, falling 2.61% and 3.49% respectively, whilst the bright spot was the Shanghai Composite (China) which rebounded 5.35% for the week as the number of new cases in the country is now falling.
Looking at economic data releases, unsurprisingly activity in Asia has also fallen. The Chinese Markit PMI (purchasing managers’ index) activity index for the services sector dropped from 51.8 in January to 26.5 in February, the lowest level since the survey was introduced in 2005, whilst the equivalent survey for the Japanese services sector also showed a large fall in its headline index from 51.0 in January to 46.7 in February. Readings below 50 indicate a detraction in economic activity.
Bond yields reach a historic low
Elsewhere, within Fixed Income, investors sought the safety of long dated government bonds. Across major government bonds, yields which move inversely to their bond price, all fell sharply. For example, the 10-year US treasury yield broke through the 1% mark reaching an all-time low of 0.77% before finishing trading as at 9am London time at 0.79%. The yield was 1.9% only as far back as January. Similarly, 10-year equivalent gilt and bund yields fell by 20 and 12 basis points respectively. The 10-year Gilt also reached a historic low of 0.24%, whilst the German 10-year Bund is now trading at even further negative territory, of -0.72%. As well as the continued flight to safety, yields continue to be put under pressure as market participants are betting on a further main policy rate cut by the Fed later this month.
Flight for safety also boosts Gold prices
Commodities were also widely affected by virus fears. Gold, another perceived safe haven asset, rallied strongly by 7.76% over the week to trade at $1,688 per ounce. Oil on the other hand struggled. Brent crude oil fell by 5.54% to finish trading below the $50 mark at $47.72 per barrel. Further travel restrictions and worries about a decline in global demand for oil due to the virus outbreak hurt prices. In the meantime, OPEC (Organization of the Petroleum Exporting Countries) are proposing to cut supply by 1.5 million barrels per day until June, to help prop up prices.
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