A selection of articles looking back through the markets last month.
Global Market Review
Investors take fright as coronavirus takes hold
As the spread of coronavirus gathered pace across the world during February, investors became increasingly concerned that the economic impact could trigger a global recession.
“Central banks are coming under pressure to respond to the impact of the virus via monetary policy”
The World Health Organisation, (WHO) reported 85,403 confirmed cases of coronavirus worldwide as at 29 February, with 2,924 deaths recorded. In the UK, 23 cases had been diagnosed by the end of the month. Share prices plunged: over February as a whole, the FTSE 100 Index fell by 9.7%, while the Dow Jones Industrial Average Index dropped by 10.1%. In Europe, the Dax Index fell by 8.4% and the CAC 40 Index declined by 8.5%, while in Japan, the Nikkei 225 Index and the Topix Index fell by 8.9% and 10.3% respectively.
According to Standard & Poor’s (S&P), sectors that are likely to prove especially vulnerable to the impact of the virus include those with heavy exposure to discretionary consumer spending – for example, leisure and travel – and those that rely on Chinese supply chains and demand, such as technology and automotive. During the month, many companies warned that the virus will have an adverse effect on revenues or earnings, although the impact at this stage remains hard to quantify. They included transport and travel companies such as British Airways parent company IAG and easyJet, technology companies including Apple and Microsoft, and drinks manufacturers AB InBev and Diageo.
Although central banks are coming under pressure to respond to the impact of the virus via monetary policy, many have limited scope to take action. US Federal Reserve (Fed) Chair Jerome Powell acknowledged that the coronavirus “poses evolving risks to economic activity” and pledged to “use our tools and act as appropriate”, fuelling speculation that the Fed will cut its key federal funds rate in March. Elsewhere, China’s authorities have already implemented a series of measures designed to shore up its economy.
Government bond yields tumbled as investors headed for perceived “safe-haven” investments. During the month, the yield on the benchmark US Treasury bond fell to a record low, dropping below 1.2%, while the benchmark UK gilt yield declined to its lowest level for four months. Meanwhile, the price of gold rose to its highest level for seven years. In comparison, Brent Crude oil fell below US$50 per barrel – its lowest price since 2017 – amid speculation that demand will drop sharply.
Asia & Japan Market Review
Double-digit falls in Japan
Asian markets came under pressure during February as coronavirus continued to tighten its grip. By the end of February, South Korea was second only to China in terms of diagnosed cases of coronavirus, with 3,150 confirmed cases. Japan was second with 230, followed by Singapore and Australia with 98 and 24 cases respectively.
“This is affecting global supply chains … when planes aren’t coming in … planes aren’t going out” (Australian PM Scott Morrison)
The Japanese yen – which is often regarded as a safe-haven asset during periods of market instability or economic decline – strengthened against the US dollar, spiking above ¥112 before ending the month just above ¥108.
Japan’s economy contracted at an annualised rate of 6.3% during the three months to December. Growth was dampened by October’s consumption tax increase, the trade conflict between the US and China, and the impact of Typhoon Hagibis. Factory output dropped sharply in February, falling at an annualised rate of 2.5%. The economic outlook has been clouded by concerns over the spread of coronavirus, particularly with the Olympic Games due to start in a matter of months.
Exports declined at an annualised rate of 2.6% during January, following December’s fall of 6.3%. Shipments to the US fell by 7.7%, while exports to the rest of Asia dropped by 3.2%, undermined by lower demand from China and South Korea. Investors fear a more substantial decline in February as coronavirus affects demand from China and elsewhere in the region. The Nikkei 225 Index fell by 8.9% during February, while the Topix Index declined by 10.3%. The TSE Second Section Index – representing medium-sized companies – dropped by 14.5%.
Australia’s Treasurer Josh Frydenberg warned that coronavirus is likely to have a broader and more significant impact on Australia’s economy than the recent bushfires. At the same time, Prime Minister Scott Morrison observed: “This is affecting global supply chains … when planes aren’t coming in … planes aren’t going out”. The ASX All Ordinaries Index fell by 8.6% during February.
South Korea’s economy is coming under pressure from the coronavirus, and policymakers at the Bank of Korea (BoK) highlighted contracting consumption and a deceleration in exports caused by the outbreak. Central bank officials believe that South Korea’s economic growth will be affected, although uncertainties remain high. Nevertheless – and despite widespread expectations of a cut – South Korea’s key interest rate remained unchanged at 1.25% in February. The Kospi Index fell by 6.2% over the month.
Emerging Markets Review
China moves to support its financial system
Having been shut from 23 January to combat the continuing spread of coronavirus, China’s stock market reopened on 3 February and the benchmark Shanghai Composite Index promptly fell by almost 8% in a single day. As the month went on, share price performance proved choppy; nevertheless, prices rallied as the number of newly diagnosed cases outside China outstripped those within China. Over February as a whole, the Shanghai Composite Index fell by 3.2%.
“Large-scale stimulus measures have the potential to jeopardise other key policy goals”
The People’s Bank of China (PBoC) injected 1.2 trillion yuan into the financial system in order to ensure sufficient liquidity; China’s central bank also cut its lending rate to financial institutions from 3.25% to 3.15%, and went on to reduce its one-year prime lending rate from 4.15% to 4.05% and its five-year prime lending rate from 4.80% to 4.75%. Elsewhere, over 300 Chinese companies applied for bank loans to offset the financial impact of the coronavirus.
China’s authorities announced their decision to postpone its annual National People’s Congress (NPC) because of the outbreak. This is a key meeting in which the country’s aims – including its economic targets – are set out. Credit ratings agency Fitch believes that “huge uncertainties” remain over the potential impact of the virus, but warned that large-scale stimulus measures have the potential to jeopardise other key policy goals such as the reduction of risks in the financial sector.
Policymakers at Brazil’s central bank cut its key Selic interest rate by 0.25 percentage points to 4.25% during February. The Monetary Policy Committee (Copom) said that it did not expect to implement any further reductions in the short term, and its next steps will depend on the evolution of economic activity, the balance of risks, and the outlook for inflation. The Bovespa Index fell by 8.4% over February.
India’s economic growth continued to slow during the final three months of 2019, posting growth of 4.7%, compared with the previous quarter’s growth of 5.1%. Looking ahead, coronavirus is expected to put a brake on growth during the first three months of 2020 against a backdrop of disrupted supply chains and lower demand from key markets such as China. Investor sentiment in India was also marred by unrest during protests over the government’s controversial citizenship laws. Over February, the CNX Nifty Index fell by 6.4%.
Europe Market Review
European markets fall in February
The coronavirus continued its spread into Europe during February, with Italy the hardest hit country by a significant margin. By the end of the month, Italy had 888 confirmed cases, but over 20 European countries were affected, including Germany and France with 57 cases apiece. The Dax Index fell by 8.4% during February, while the CAC 40 Index dropped by 8.5% and Italy’s FTSE MIB Index declined by 5.4%.
“Monetary policy cannot, and should not, be the only game in town” (ECB President Christine Lagarde)
Economic activity in the euro area showed signs of picking up during February, fuelled by growth in services and a moderation in the manufacturing sector’s decline. Nevertheless, IHS Markit warned that the outlook remains “highly uncertain” in the light of the spread of coronavirus, citing disruption to supply chains, travel, tourism, and general demand. Looking ahead, the delays in February deliveries “bode ill for March” and the full impact of the virus has yet to be established.
Germany’s economy stagnated in the fourth quarter of 2019, posting zero growth following third-quarter growth of 0.2%. On an annualised basis, the country’s economy grew by just 0.4%, dampened by weak export activity and slower growth in consumer and government spending. Over 2019 as a whole, Germany’s economic growth decelerated to 0.6%, representing its lowest annual growth since 2013.
European Central Bank (ECB) President Christine Lagarde urged European governments to play their part in addressing the eurozone’s economic slowdown, stating: “Monetary policy cannot, and should not, be the only game in town … other policy areas – notably fiscal and structural policies – also have to play their part”. In a statement to the European Parliament, she also defended the central bank’s ultra-low interest rate policy, acknowledging that it has affected savings income, asset valuations, risk-taking, and property prices, whilst maintaining that it had also helped to “preserve favourable lending conditions … (and) shield the euro area economy from global headwinds”.
As a whole, the eurozone posted quarterly economic growth of only 0.1% during the final three months of 2019. While Germany’s performance was a major contributor to this broader weakness, France and Italy also played their part, contracting by 0.1% and 0.3% respectively during the fourth quarter. In contrast, Spain’s economy expanded by 0.5% quarter on quarter.
The eurozone’s annualised rate of inflation strengthened from 1.3% in December to 1.4% in January, boosted by higher prices in services, food, alcohol & tobacco, and energy.
Global Bond Market Review
Bond yields hit record lows
Global bond yields extended their January declines into February as investors became increasingly worried about the potential economic impact and human cost of the coronavirus. As the virus continued to spread and intensify around the world, investors focused on the perceived “safe havens” of assets such as government bonds and gold.
“The US yield curve inverted to its most negative point since October 2019”
During February, the yield on the benchmark US Treasury bond fell from 1.51% to 1.15% , reaching its lowest level since 1962. Meanwhile, the yield on the 30-year Treasury bond ended the month at 1.68%, representing its lowest level for 43 years. The US yield curve inverted to its most negative point since October 2019, reflecting investors’ pessimism over the economic outlook. Elsewhere, the benchmark German government bond yield fell from -0.64% to 0.72% during February, and the yield on the benchmark French government bond declined from -0.47% to -0.54% .
The coronavirus poses a significant risk to global credit conditions, according to S&P Dow Jones Indices , which believes that disruption to trade, to the flow of people, and to global supply chains, alongside lower commodity prices, will have a widespread impact, particularly in Japan and the rest of Asia, with Hong Kong and Singapore expected to be particularly hard-hit. In Europe, the effects of interruptions to European value chains are likely to be exacerbated by low inventory levels, and Germany is regarded as especially vulnerable to disruption. In the US, the economy is likely to be affected by lower demand from China, and interruptions to travel and tourism. Above all, however, the outlook remains highly uncertain, and questions remain over the length, extent and impact of the outbreak.
Fixed income funds were the most popular amongst UK retail investors during January, according to the Investment Association (IA) , notching up £1.7 billion in net retail sales – more than three times more than in January 2019. Demand was fuelled by concern over coronavirus. Global Bonds was the second most popular IA sector during the month with net retail sales of £358 million, followed by £ Corporate Bonds on £309 million. £ High Yield and Global Emerging Markets Bond also figured in the top-ten most popular IA sectors. In contrast, the least popular sector during January was UK Index Linked Gilts, which experienced a sharp drop in demand, posting outflows of £161 million during the month.
UK Bond Market Review
Gilt yields fall as investors head for the hills
Government bond yields dropped sharply during February as the coronavirus continued to spread across the world, fuelling concerns over the impact on global economic growth. Worried investors hurried towards the “safe havens” of government bonds and gold, and drove down the yield on the benchmark UK Government bond to its lowest level for four months. Over February as a whole, the yield on the benchmark UK gilt fell from 0.53% to 0.44%.
“The EU is ready to grant the UK “super-preferential” access … but the UK has to accept EU standards”
The UK Government unveiled its negotiating stance towards its future relationship with the EU. The EU’s Chief Brexit Negotiator, Michel Barnier, said that the EU is ready to grant the UK “super-preferential access” to EU markets, but the UK has to accept EU standards. According to credit ratings agency Standard & Poor’s (S&P), the closer the UK remains aligned to EU regulatory standards, the lower tariffs and trade quotas with the EU are likely to be. Meanwhile, credit ratings agency Fitch highlighted some of the potential “flashpoints” for the negotiations – including fisheries and the enforcement of Northern Ireland border arrangements – and outlined various possible scenarios, including a trade “cliff-edge” or even an extension to the transition period.
The UK economy stagnated during the final quarter of 2019. Growth in the services and construction sectors was offset by a contraction in manufacturing which was exacerbated by poor performance from the beleaguered automotive sector. Over 2019 as a whole, the UK economy posted growth of 1.4%, compared with 2018’s rate of 1.3%. In comparison, Germany’s economy grew by 0.6% over 2019, while France expanded by 1.3% and the US grew by 2.3%.
Higher prices for fuel drove up the rate of consumer price inflation in January from 1.3% in December to 1.8% to reach its highest level since August. Despite this, inflation remains below the Bank of England’s (BoE’s) target of 2%, boosting speculation over the possibility of a rate cut at the Monetary Policy Committee’s (MPC’s) next meeting. Elsewhere, average UK earnings (excluding bonuses) rose to their highest level since March 2008 over the three months to December, climbing at an annualised rate of 3.2% to reach £512 per week. Retail sales rallied in January, posting their first increase after two consecutive months of decline. Sales rose by 0.9% month on month, and sales of clothing increased by 3.9%.
UK Equity Market Review
Companies warn on profits as coronavirus bites
Share prices tumbled during February as the extent and severity of coronavirus continued to intensify. By the end of the month, 85,403 cases had been confirmed worldwide, with 23 cases in the UK.
“The UK says it wants ‘Canada’. But the problem with that is that the UK is not Canada” (Michel Barnier)
Over February as a whole, the FTSE 100 Index fell by 9.7% while the FTSE 250 Index dropped by 8.6%. Travel and leisure companies were particularly hard-hit by the spread of coronavirus: British Airways parent company IAG warned that its profits would be affected by the virus, but was unable to quantify the impact at this stage. While IAG’s share price fell by 17.1% over February as a whole, budget airline easyJet dropped by 21%. The share price of holiday company TUI Travel declined by 22.9%, and cruise company Carnival dropped by 21.9%.
Primark’s owner – Associated British Foods – warned that disruption to production in China could harm the availability of some of its products. ABF’s share price fell by 14.1% over the month. Meanwhile, Standard Chartered – which derives a large proportion of its earnings from Asia, and from China in particular – issued a profit warning, and its share price fell by 10.9% during February.
The Government published its approach to negotiations on its future relationship with the EU during February. The UK is aiming to achieve a trading relationship with the EU along similar lines to the agreements the EU has with Canada, Japan or South Korea. Nevertheless, the UK remains prepared to call off trade discussions if there is no “broad outline” of an agreement by June, in which case it would consider changing its focus to concentrate on domestic preparations on WTO terms.
The UK’s Chief Brexit negotiator David Frost called for a “Canada Free Trade Agreement-type relationship” with the EU. However, the EU’s Chief Brexit Negotiator, Michel Barnier, said: “The UK says it wants ‘Canada’. But the problem with that is that the UK is not Canada … our relationships with the UK and with Canada are worlds’ apart”.
The British Retail Consortium (BRC) called on the UK to reach “pragmatic solutions and agreements” with the EU, warning: “Higher tariffs and extensive checks will harm consumers, retailers, and the UK economy. The BRC believes that “excessive or avoidable” checks would lead to delays, higher costs and increased administration for UK businesses, and higher prices and reduced availability for consumers.