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Monthly Market News March 2020
By Johan Gallopyn - Investment Desk Analyst
March 2020 will be etched in our memories forever. Due to the rapid worldwide spread of the corona virus, and for investors also due to the cost to the economy and the financial markets. Our expert, Johan Gallopyn, analyses the extreme movements in the equity, bond, foreign exchange and commodities markets during the month of March.
Equity markets: extreme volatility
The 19th of February seems a distant memory. On this date, the S&P500 and the Stoxx600 still reported new historic records. Hardly a month later, equity markets were at least 30% lower, the steepest drop ever in such a short period. At the end of the month, stock exchanges were able to recuperate a limited part of the losses, but the first quarter of 2020 closed as the worst since the fourth quarter of 2008 during the financial crisis. In March, the S&P500 reported both the steepest drop (-11.98% on 16 March) and the strongest rise (+9.4% on 24 March) on a daily basis in many decades. The containment measures will cause a global recession, now that the corona virus has spread across the world. The oil price crash after the collapse of the OPEC+ pact contributed to the deterioration of the stock market. 2020 was going to be the year of the recovery of corporate earnings, but investors are now bracing themselves for substantial losses, cancellations of dividend payments and the suspension of equity buyback schemes. Energy, airlines and tourism were the weakest performing sectors. Less negative were technology, pharmacy and consumer goods.
Bond markets: central bank measures stabilise the market
Bond rates were rocketing in the middle of March: US 10 year rates increased from 0.50% to 1.25%, German 10 year rates from -0.87% to -0.18%. Here too, liquidity requirements for certain market parties played a role in the drop of prices of government bonds, in addition to fears that government debts will increase substantially. Due to a communication error of ECB President Lagarde during a press conference “We are not here to close spreads”, rates of Italian government bonds and other peripheral countries rose. However, monetary measures confirm that the means deployed by the ECB to defend the Eurozone will be unlimited. The spread for European ‘investment grade’ corporate bonds rose to 250 bps against 90 bps mid-February. This is higher than the levels that were reached in 2015-2016, when the market became nervous due to the Chinese slowdown in growth. The spreads remain well below the levels of 450 bps reported during the financial crisis in 2008. The spreads for high yield bonds rose to just under 800 bps. Due to the measures of the central banks (purchase programmes), the spreads stabilised.
Central bank: unprecedented measures
In a crisis situation, central banks operate in the context of their task as “lender of last resort”. Their measures focus predominantly on guaranteeing liquidity in the financial system and on providing credit, rather than on policy rates.  Across the globe, large-scale initiatives were developed in this respect. They involve refinancing transactions on favourable conditions for commercial banks, allowing them to continue to provide credit to families and companies. Furthermore, both government and corporate bonds are bought on a large scale. The ECB as well as the Federal Reserve has made it clear that the amounts involved are unlimited. Furthermore, during two unscheduled emergency meetings, the American Federal Reserve lowered the policy rate to the level of 2009. A first rate cut of 0.50% took place on 3 March, followed by a 1% decrease on 15 March.
Foreign exchange: everyone wants dollars
The US dollar was flat over the month, but throughout March the currency fluctuated between 1.14 and 1.07 against the euro. Initially, the dollar weakened due to the rate reductions by the Federal Reserve, dissolving the rate advantage enjoyed by the currency so far. However, as the corona crisis escalated and financial markets collapsed, the US dollar rocketed. Investors stock-piled dollars as they regard the currency to be a safe and liquid investment. The currency stabilised after the Fed opened dollar credit lines on favourable conditions with the main central banks in the world to prevent a shortage of dollars in the financial system. The pound sterling weakened considerably in the course of March and equalled the lowest Brexit levels against the euro and even the lowest since the mid-eighties against the USD. This can be attributed to the general flight to the dollar and the initially weak response of the British government to the corona threat. Commodity-sensitive currencies experienced a significant decrease. The Norwegian krone lost 10.8% after the oil price crash and two rate cuts in two weeks. Currencies of emerging countries also suffered considerably.
Commodities: oil price drops by 50%
Early March, Russia refused the proposal of Saudi Arabia to further push up production cuts. This was supposed to be a response to the drop in oil consumption caused by the corona crisis. Saudi Arabia responded by changing tack and will now be increasing production as well in order to safeguard its market share. Due to the drop in demand and increase of supply, the world is flooded with oil, to the extent that a shortage of storage capacity is looming. On 9 March, the oil price dropped by nearly 25% and at the end of the month, the price of Brent oil was halved to just over USD20 per barrel, a level that had not been recorded since 2002. Industrial commodities dropped significantly amidst fear of a global recession. Copper prices fell by approximately 15% (in USD). Gold prices experienced remarkable movements in the last month, and dropped just below USD1,500 per ounce. Technical elements played a role (liquidity requirements of some investors), but valuation elements also had a subduing impact on prices. Due to the reduced inflation expectations, the real rates (and therefore opportunity costs) increased, which makes gold less attractive.

MSCI indices: source MSCI. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.

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