Last week was a tad bruising for equity investors.
My guess – and it is only a guess – is that this week might be less horrid though I would expect markets to tank again if a major government decides to in effect go into lockdown mode. The big risk here is that the US government has been enormously complacent up to now, but suddenly decides to go into reverse and panic (especially with that all-important election coming up). By comparison, I’d suggest that the UK government has been sensibly measured up to now.
Anyway, I’m not massively keen to start wading back into equities at this exact moment at least until we’ve seen an index move past the 15 to 20% correction level. By my calculations, the FTSE is down around 14% from its peak, the FTSE 250 down 12.35 and the S&P 500 down 12.8%. My finger in the air guesstimate is that I’d be starting to buy aggressively once the FTSE 100 pushes below 6500, the S&P 500 below 2800 and the FTSE 250 below 18500.
What is clear is that February was a terrible month for investors. We’ve just had the latest S&P Dow Jones analysis in and it doesn’t look good.
According to Howard Silverblatt from the index firm, in February the U.S. “had turned a 3.67% gain into an 8.36% decline, as the composite global market turned a 2.40% gain into an 8.29% decline. For the month, only one of the 49 markets gained, down from last month’s 11 and almost a complete opposite from the prior month’s sweep, where all 49 countries gained. February posted an 8.29% decline, after January’s 1.42% decline and December’s broad 3.40% gain. Absent the U.S.’s 8.36% fall, the global non-U.S. market was down a tick less, at -8.20% for the month”.
The 10-year U.S. Treasury closed at 1.15% (trading at a 62-year low), down from last month’s 1.51% (1.92% at year-end 2019, 2.69% at year-end 2018, and 2.41% at year-end 2017). The 30-year U.S. Treasury closed at 1.68% (trading at a 43-year low), down from last month’s 2.00% (2.30%, 3.02%, 3.05%).
What happens next, might be determined by two key measures – the service economy and central banks. Let’s start with the latter. The consensus narrative is that the Chinese Pboc has swung aggressively into action and its peers from the developed world are about to trigger a big stimulus. Back in the real world, the numbers coming out of research firm Cross Border Capital suggests a more cautious stance.
Their latest weekly data report says that major Central Banks’ aggregate balance sheet growth was “off the pace recorded at the start of the month (+3.3% 3m ann.). The Fed remains firmly in easing mode but all other majors are curtailing liquidity growth including, and perhaps most surprisingly, the People’s Bank of China. We would expect some change in direction soon, given the widening negative impact of the Coronavirus crisis on financial markets and economic activity. Liquidity growth in ‘current’ USD terms is also weakening (+1.6% 3m ann.), dented by BoJ and BoE tightening and compounded by US dollar recovery versus their respective currencies.”
My guess is that the central banks will wait a few weeks before they launch a more coordinated stimulus. My finger in the air guess would be towards the middle/end of March.
And services, especially in Europe?
This sector has been crucial to investor confidence. Broadly, manufacturers have had a hard time but services businesses have remained resilient, preventing more than a few economies (such as Germany) slipping into recession. According to analysis from DWS, “there is now fear that exactly the opposite might happen, with service providers slowing down. The coronavirus turns out to have thrown quicksand into the gears of the global economy. Many service providers have been severely afflicted. Airlines, tourism, gastronomy, cultural and sports organizers are only the most obvious victims. The economic data published so far already showed the first signs of a slowdown in the Far East. The first week of March is likely to be particularly revealing for the rest of the world. The business-confidence surveys that will be published then, should give a better sense of the extent to which the service providers are initially pacing the global economy. In any case, the industry is not expected to maintain the momentum of its recent acceleration.”
Last but by no means least, an interesting supply chain nugget of information. According to research firm Lalcap in London, “India supplies nearly a third of medicines sold in the United States, the world’s largest and most lucrative healthcare market. Indian companies are an important supplier of generic drugs to the world and up to 70% of active pharmaceutical ingredients come from China”.