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5th March Market Commentary

By Henry on 2020-03-05

"Extraordinary measures" this week including the release of prisoners...

... a headline I could never have imagined... yet... true! It has been quite a week, and it's only Thursday!

We have witnessed gigantic moves in many safe haven assets, where institutional money has continued to shift out of equities and other risk assets into government bonds and gold, at a pace not seen since the financial crisis.Whilst volatile stock markets have hit the newswires everywhere, as well as the major interest rate announcements, the degree to which countries are looking to bolster economies as well as slow the spread of Coronavirus has been rather broad and at times, somewhat irrational, looking in from the outside.

In Hong Kong, the much-mooted idea of “helicopter money” is being tested. In simple terms, this involves the government directly crediting citizen’s bank accounts, in this instance to the tune of HKD 12,000 (approximately GBP 1,200) to put cash directly in people’s pockets, hoping that it is used to spend [1]. However, in times of uncertainty, human behaviour tends toward conservatism, so whether this spending transpires or whether the funds end up under a mattress or being used to pay down debt will be interesting to see. Iran has taken a yet more unusual measure. Almost 10% of MPs have tested positive for the virus, and to curtail the spread in prisons, 54,000 inmates have been released [2].

In the month of March, we have seen as many interest rate cuts as there have been days, with Australia, Canada, Saudi Arabia and the US easing [3]. This is also being backed-up by broader packages to stimulate domestic economies off the back of the global supply shock currently being experienced. The Fed defined their rather dramatic emergency cut as “insurance”. Whilst not immediately obvious how a Strepsil might help with a broken leg, stresses in several sectors are certainly becoming apparent. Autos and airlines have been obvious targets. Anyone still wondering how fickle the market can be need look no further than the European banking sector. Less than a month ago, it was a blanket "screaming buy" [4]. Today the respective bond market is being described as “risky” with some of the more recent bond issuances performing poorly. Greed and the hunt for yield appear to have been well and truly side-lined with fear taking centre-stage [5]. Perhaps this represents a return of the "credit spread", the basic and logical concept of being rewarded more highly for taking additional risk, which appears to have been somewhat forgotten in recent years.

From our perspective this re-pricing of risk is welcome as, no matter what your opinion of the current threats, policies and prices, the speed with which the situation has unfolded is a stark reminder of the precarious nature of a late-cycle global economy and the pace at which things can change. Having a safe store of cash in the government or lending with the additional safety net of security is no bad place to ride out these storms.