What happened:
For European stock markets this was the worst quarter since the financial crisis in 2008. For the S&P it was the worst quarter since 1938. After having reached an all-time record on Feb. 19, it took 16 days for the index to move into bear territory ending an 11-year bull market.
Oil reached an 18-year low as a COVID-19 demand side shock combined with the war for market share between Russia and Saudi Arabia created the perfect storm. Over the weekend, WTI briefly undershot the $20 per barrel mark. The supply glut needs storage, which is limited and increasingly comes at a price.
By Wednesday morning in Europe, Asian and European markets as well as US futures were down in reaction to the chilling press conference where US President Donald Trump announced that America should expect as many as 240,000 deaths – despite social distancing and having shut in vast parts of the economy.
UK banks took a hit as they halted dividends and share buy-backs.
Why it happened:
More than 90 percent of the global economy has seen a shut in for a large part of activity, which was a demand side shock in almost all sectors.
The March European Purchasing Managers’ Index (PMI) of 44.5 reflected the sharp drop of economic activity. The short and dramatic rally induced by eyewatering stimulus packages in most OECD countries was short lived.
Investors flocked to safe-haven currencies such as the dollar, the Swiss franc and the yen. US treasury yields oscillated as investors sought the relative safety of the US 10-year treasury on the one hand and were spooked by the sheer size of the country’s rescue package on the other.
Some of the worst-hit sectors are tourism, which employs more than 300 million people worldwide, hospitality and aviation. The director general of the International Air Transport Association, Alexandre de Juniac, expects the sector to burn through $61 billion of cash in the second quarter as revenue is set to crater by 68 percent. He told Bloomberg that most airlines will run out of cash within two to three months.
Where we go from here:
Most analysts forecast that it will take a long time until markets reach their January-February highs again. We should not expect Asian or European economies to recover as long as the coronavirus crisis holds the US in its grip.
As for oil, the situation will get worse before it gets better. As of April 1, OPEC+ members are no longer bound by the December agreement which took 2.1 million barrels per day out of the market. They now can, and some will pump at will, leading to bankruptcies among high-cost producers with high leverage, particularly in the US shale patch.
Most international oil companies have announced substantial cuts in their capex guidance, reflecting the cash crunch due to sliding oil prices. Wednesday morning brought a glimmer of hope as Russia announced it would not boost output further amid the COVID-19 demand shock.
The discourse continues on whether companies which receive state funds from rescue packages should be allowed to buy back shares or pay dividends. The same applies to banks. It will be interesting to see how these developments will influence choices in investment portfolios going forward.
— Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairman and CEO of business consultancy Meyer Resources.
Twitter: @MeyerResources
