How much damage has the coronavirus and the oil price collapse inflicted on global financial markets this year? Put simply, it has probably been the most destructive sell-off since the Great Depression.
The numbers have been staggering. US$15-trillion has been wiped off world stock markets, oil has slumped 60 per cent as Saudi Arabia and Russia have started a price war and emerging markets such as Brazil, Mexico and South Africa have seen their currencies plummet more than 20 per cent.
Volatility and corporate borrowing market stress has spiked on worries that whole sectors could go bust, airlines have had half their value vaporized, while cratering economies risk a new wave of government debt crises.
“It has been like a train wreck,” Chris Dyer, director of global equity at Eaton Vance, said. “You could see it coming and coming and coming, but you just couldn’t stop it happening.”
That carnage has seen 22 per cent and 24 per cent slumps for Wall Street’s Dow Jones and S&P 500, almost 25 per cent for MSCI 49-country world index and 27 per cent for London’s internationally exposed FTSE.
For reference, the record quarterly drop for Wall Street was 40 per cent in 1932 in the midst of the Great Depression. The fact that the S&P and Dow were at record highs back in mid-February has made the crash this time seem more brutal.
Stocks in China, where the virus hit first, have faired relatively well in comparison with only an 11-per-cent drop in dollar terms, but the impact on other major emerging markets has been devastating as their main commodity markets, and currencies, have also collapsed.
Russian stocks, which topped the tables last year, have been routed 40 per cent in dollar terms. South Africa, which was stripped of its last investment grade credit rating on Friday, has fallen by the same percentage, although Brazil has been the worst, plunging 50 per cent.
A large part of that is down to some wild FX market moves. All three of those countries have seen their currencies lose more than 20 per cent this year, which also ties in to the commodity market carnage.
Brent crude oil has fallen by 62 per cent in the quarter to just $25 a barrel. This was not only because of the coronavirus crisis, but also the price war between Saudi Arabia and Russia, which is putting their public finances at risk.
Industrial metals such as copper, aluminum and steel have all dropped between 15 per cent to 22 per cent, and some agricultural staples like coffee and sugar are down 17 per cent and 10 per cent.
“These are truly historical moments in the history of financial markets. 2020 will go alongside 1929, 1987 and 2008 in the textbooks of financial market panics,” Deutsche Bank Strategist Jim Reid said.
GIVE ME SHELTER
So are there any places to shelter? Yes, but not many.
Sit-on-your-sofa-suited stocks such as Netflix Inc. and Amazon.com Inc., have risen 10 per cent and 2.5 per cent respectively and some specialist medical equipment companies have surged.
Ultrasafe U.S. government bonds have returned 13 per cent as the Federal Reserve cut U.S. interest rates to effectively zero, leading a charge of around 62 interest-rate cuts globally.
The dollar has rocketed against emerging market currencies. It had also shot up against the majors too, but has eased back over the past two weeks and will end the quarter only 2-per-cent up against those bigger currencies.
This has left the Japanese yen, the other traditional FX safe-haven, with only a 0.4-per-cent gain. The Swiss franc is down against the dollar, although it has climbed steeply against the euro and many other currencies.
Will April bring much relief? JPMorgan reckons the coronavirus will have pushed the world economy into a 12-per-cent contraction in the first quarter, and with the pandemic still spreading rapidly and keeping large parts of the global economy shuttered, it is unlikely to get much easier in the second quarter.
The cavalry has arrived though. Group of Twenty governments have promised a $5-trillion revival effort, major central banks have cut rates and restarted asset purchases. Markets bounced big last week until Friday came and may still end the first quarter on a relative high.
Stephane Monier, chief investment officer of Lombard Odier, is looking to see whether infection rates in Europe and elsewhere peak as they did in Asia. If they do, markets could see a V-shaped 30-per-cent recovery, although if they do not and cases jump in Asia again as lockdowns are lifted, it could be akin to a “war” situation, which would impact the economy for 1-1/2 years.
“Our expectation is for a very volatile second quarter,” Ms. Monier said. “It is important to keep in liquid, high-quality assets.”