Weekly Market Update

23/03/2020

Market volatility continued last week with indiscriminately selling across a range of asset classes including government bonds and gold as investors hoarded cash at any price.

There was an overall sense that distressed selling was occurring in the market with assets being sold at any price by struggling hedge funds, to meet margin calls and redemptions. A combination of very weak sentiment, and a feeling that for the moment cash is king has meant financial markets endured a very difficult week.

Although equities had another volatile week, the bounce towards the back end of the week left some equity funds with strong returns. The stronger US dollar also provided an uplift to those overseas equity funds.

Fixed Income and alternatives struggled as investors sold liquid and safe-haven assets to hoard cash for their short-term needs. Many stocks have been oversold particularly in alternative sectors. Examples include small industrial warehouses REITs (largely occupied by Amazon), and care homes which still maintain stable income streams.

The past few days have indeed seen several more announcements as authorities race to control the spread of the coronavirus whilst simultaneously trying to mitigate the impact of their actions on households and companies affected by the economic shutdown now taking place. There are many echoes of 2008 in the central bank actions, as policymakers attempt to ensure no significant cracks appear in the financial system that could make a difficult situation even worse.

The dollar still reigns as king of currencies in times of turmoil, with the Japanese yen also offering investors its usual port of safety. Sterling has, however, slumped sharply and is trading at levels not seen since 1985. The currency suffered from a combination of heightened demand for the dollar, due to its liquidity and safe-harbour appeal, concern over the UK government’s strategy to deal with the virus, and the fact we have an external trade deficit, which means the economy needs capital inflows to fund this gap.

In the US, the weekly employment data showed a sharp upwards spike last week in unemployment claims. The US administration is in a hurry to channel cash to companies and individuals to firstly stop companies laying off staff and secondly ensuring those that do lose their jobs have financial support. Presidents don’t tend to win elections when unemployment is rising and with stock markets having erased all of their gains since he took office, President Trump is clearly very conscious of the need to take swift action, even if the medical response in the US still appears to be slow to react to the growing problem, not helped by a fragmented healthcare system.

On a more positive note, China for the first time reported zero home-grown cases since the outbreak began. Residents in the city of Wuhan are allowed outside once again. Factories are re-opening. China is not back to normal but over time we will see if the extreme methods of suppression have worked. The risk for China is now from imported cases from the rest of the world, hence one would expect travel restrictions to remain in place for some time.

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