Market review of the first quarter 2020

Posted by Liz Rees in Market commentaries category on 09 Apr 20

Market Update Chart

Europe ex UK
1st Quarter 2020 -20.0% -19.7%  -24.0%     -21.1% -20.0%  -19.4% -10.3%
Source: FE Analytics, performance on a total return basis in local currency 31/12/2019 -31/03/2020.

Quarter 1 performance: Coronavirus strikes

The year began optimistically; US-China trade wars had reached a temporary truce and the cloud of Brexit uncertainty was finally lifting, with global growth set to pick up.  

Investors initially ignored the coronavirus (Covid-19) outbreak in China. It was considered an isolated occurrence that might cause some disruption in supply chains in the first quarter followed by a rapid ‘V’-shaped recovery.

However, a large number of cases in Italy brought home the gravity of the situation. As more countries went into lockdown it was clear the economic impact of the coronavirus was going to be huge. Stock markets began to fall in the last week of February and by the middle of March the US market had seen the fastest bear market in its history, taking just 20 days to fall 20%.

Over the quarter, however, every major market registered significant declines. The worst affected was the UK with a 24% fall, partly due to its high exposure to the oil sector which suffered when Saudi Arabia ramped up supply as demand dropped.  

Chinese share prices dropped the least, having been the first to enter lockdown and were showing signs of restoring economic activity.

Key events of the quarter

Coronavirus naturally dominated the quarter but only really started impacting stock markets at the end of February. China was the first to slash interest rates and launch fiscal stimulus as factory closures hit global supply chains. Its key manufacturing sector is slowly returning to work but faces a slump in demand from the West.

Having learnt lessons from the Global Financial Crisis, western governments moved swiftly. The US Federal Reserve made two emergency interest rate cuts, taking them close to zero. The US senate approved a $2.2tn spending package including cash payments to individuals.

The UK government took swift action to limit the effect on the economy. In a co-ordinated response with the Bank of England. Interest rates were cut initially to 0.25% and later 0.1%. £12bn of measures were announced in the Budget and were soon extended to a £350bn emergency rescue package which includes loan guarantees for businesses.

Europe and Japan had less scope for interest rate reductions but the European Central Bank (ECB) announced $120bn of bond purchases whilst Japan increased purchases of ETFsto $112bn.

The second black swan event of the period was a dramatic collapse in the oil price. Early in the year, Brent crude breached $70 a barrel on renewed conflict between US and Iranian military forces but had already fallen back on fears of a downturn in travel and transport.

However, on March 9 the price slumped over 30% when Saudi Arabia unexpectedly launched a price war after the breakdown of its alliance with Russia. Saudi had agreed with OPEC2 to lead massive supply cuts but when Russia refused to co-operate it responded by raising production and cutting prices.

The timing of this couldn’t have been worse as the International Energy Agency predicted oil demand would contract for the first time since 2009. By the end of March, Brent crude had fallen below $20, the lowest in 17 years.

Early signs that coronavirus cases may have peaked in some countries prompted sharp rallies in stock markets. Whilst it is too early to say we are out of the woods yet, it is evident that there is money on the side-lines waiting to be invested. In our next article we will look at the prospects for investors when lockdowns come to an end.  

1Exchange Traded Funds
2The Organization of Petroleum Exporting Countries