As the first quarter of 2020 comes to a close, it is clear that the world is not facing a regular recession, but a shock to global markets that is unprecedented among developed economies in any post-war period. Governments around the world have to juggle both economic and health issues which can be very tricky especially amongst an increasingly political environment for some (2020 elections in the US and Singapore). Global COVID-19 cases have surged, nearing a million cases with over 45,000 deaths. Furthermore, it is evident that while China has successfully tightened her grip on the coronavirus frenzy, passing its peak, the west are in turmoil with USA exceeding 200,000 cases (twice that of Italy and Spain who are second and third respectively in total number of cases). From rates hovering around 0 and humongous stimulus packages to plummeting oil prices, governments around the world have to juggle both economic and health issues which can be very tricky especially amongst an increasingly political environment for some (2020 elections in the US and Singapore).
Both the DOW and the S&P500 have ended the quarter with historic results (-23.2% and -20.0% respectively) – DOW’s worst performance since 1987 and the latter’s worst since 2008. This bearish downtrend is underpinned by the coronavirus spread both within the US and international markets. The sell-off caused by the initial coronavirus panic hasn’t improved as the virus grabs hold of countries around the globe. With governments announcing stay-at-home orders and the shutting-down of non-essential businesses, unemployment has soared with the Fed estimating it to rise up to 32%. The resultant fall in consumption only amplifies the falling risk appetites for retail investors, fueling a “dash for cash” and causing share prices to fall.
With the yield curve inverting for the first time since mid-2007 and interest rates on short-term treasury bills turning negative on March 25 2020, investors are clearly making a dash for safer and more liquid assets which the treasury bills are perfect instruments for. Although rates have inched back to positive territory since then, investor sentiments are clear and the higher demand for short-term loans have. The month ended with the effective federal fund rate standing at 0.08% and the Treasury rates at 0.23% and 0.70% for 2-year and 10-year maturities respectively. These numbers are dangerously low, and the Fed may find themselves short on ammunition if the economy worsens as social-distancing and forced closures expand to more sectors. Investors may wish to consider diversifying their portfolios in alternative such as global macro strategies which held up during the recent sell-off considering how low rates are and the limited room government bond prices have to rise.
Commodities & Volatility
As governments impose lockdowns and social-distancing amongst other containment measures, consumer demand has plummeted, exacerbating the crashing oil prices due to the Saudi-Russian oil price war. US crude Clc1 was trading at $24.44 per barrel, its lowest in 18 years. Back in mid-2002, China had only began rising as a global economic power, propelling global oil consumption to record highs in the following years. With the coronavirus situation seeing little improvement, it is unknown whether oil will be able to make a recovery in the foreseeable future.
Market volatility has been extremely high, with the VIX index reaching a high of $82.69 on 16 March 2020. While high volatility would usually incite an increase in price of gold as investors seek to hedge against their positions in equity markets, this hasn’t held through with a mini-crash on March 7 2020, where gold’s highest level in seven years, $1703 fell to its three-month low of $1469 on March 16 2020. As the coronavirus panic slashes at global markets, the neoclassical safe haven asset is no exception with people cashing out.
Hedge fund performance has been mixed with Ken Griffin’s Kensington and Wellington funds (at Citadel) gaining 1.2% in March and Dan Loeb’s Third Point falling by 11%. Parrilla’s Quadriga Igneo fund boasted a 19.1% positive return in March, boosting its fist-quarter gains to 42.5%, defying a global market rout. It will be interesting to see how alternative strategies fare in a volatile bear market.
It has been a month of many firsts as governments juggle both economic and healthcare burdens, especially in an increasingly political environment for some (2020 elections in US and Singapore). The Fed has announced a $2 trillion stimulus package even when they have over $20 trillion in national debt. Needless to say, the package has been essential, with hospitals receiving critical funding and unemployment benefits being expanded dramatically. This may prove to be invaluable in restarting the economy when everything tides over by providing distresed business and industries with hundreds of billions of dollars in zero-interest loans, tax breaks and other emergency aid - whenever that is. The direct impact may however, be short lived and be insufficient to prevent a recession, experts claim.