Posted on 16 Mar 2020
The World Health Organization declared the coronavirus outbreak a pandemic, saying that Europe was now the “epicentre” of the crisis. While cases surged in Europe, the number of reported cases in China continued to drop, with more cases being imported from arrivals from outside of China compared to transmission within China.
Global stockmarkets plunged, with most markets entering an official bear market (defined as a decline of at least 20% from a recent peak) after President Trump banned visitors from most European countries to the US. US and UK stock suffered their steepest daily falls since “Black Monday” in 1987, while European stocks saw the largest daily falls on record. Continued sharp falls in the oil price also added to global stocks’ woes. Unusually government bonds failed to provide a safe haven as stock markets tumbled, with yields rising over the week.
The FTSE 100 plunged 17% over the week.
The UK government’s approach to the coronavirus pandemic stood in stark contrast to the rest of the world. Rather than implement draconian measures as seen elsewhere in Europe and Asia, officials said they wished to promote “herd immunity” whereby at least 60% of the population had been exposed to the virus over a number of months, although they wished to delay the peak by around a month to ease pressure on the NHS.
The Bank of England reduced the base rate by 0.5%, taking it back to its historic low of 0.25%.
In his first budget, Chancellor Rishi Sunak unveiled a £30bn package to boost the economy and get the UK through the coronavirus outbreak. Of the £30bn in extra spending, £12bn will be specifically targeted at coronavirus measures, including at least £5bn for the NHS in England and £7bn for business and workers across the UK. The Office for Budget Responsibility (OBR) said extra spending on government departments and investment represented the biggest Budget "giveaway" since 1992 and will add around £100bn to public borrowing by 2024.
The S&P 500 ended the week 15% lower, despite a 9% bounce late on Friday on news that the US administration had declared a state of emergency, freeing up $50bn to tackle the coronavirus epidemic. The decline means the 11-year bull market in US stocks has ended.
President Trump banned visitors from all Schengen countries in Europe, and later extended the ban to include the UK and Ireland.
The FTSEurofirst 300 plummeted 19% over the week.
Italy extended its northern region lockdown to the entire country; Spain introduced social isolation measures, telling people not to leave home, except to buy food and medicines, or to go to work; France shut schools, universities, closed bars, restaurants, nightclubs, cinemas and all non-essential businesses; many other European countries closed their borders.
The European Central Bank kept interest rates on hold but offered new stimulus measures, including cheap loans to commercial banks to encourage them to lend to small businesses and expanding its quantitative easing programme.
The European Union said it will put in place a package of measures, including a €37bn investment initiative. European Commission President Ursula von der Leyen said the EU response package will include giving member states flexibility on budget deficits and state aid. The EU will also guarantee €8bn in loans to 100,000 firms to support the corporate sector.
German finance minister Olaf Scholz pledged unlimited cash to businesses hit by the Covid-19 pandemic.
The Nikkei 225 tumbled 16% over the week as fears grew that the 2020 Olympics would have to be cancelled or delayed.
The People’s Bank of China cut reserve requirements for banks in a move that will free up a $79bn in funds for banks to lend to companies hit by the virus.
The Reserve Bank of Australia injected A$8.8bn into the financial system.
US Treasuries saw wild yield swings. The yield on the 10-year US Treasury closed the week near 1.0%, having touched a record intraday low of less than 0.4% on Monday. The 30-year US Treasury yield dropped below 1% during the week, taking the entire US yield curve below that level for the first time, but closed the week at 1.54%, having touched an intraday low of 0.7% on Monday.
In the US, the upward movement in yields was partially blamed on ongoing strains in the US bond market that caused the Federal Reserve to pump extra liquidity into the bond market. Risk parity funds, which typically use leverage to increase their exposure to fixed income in times of uncertainty, may also have fuelled the decline in bonds: in a volatile week, leveraged managers faced margin calls, which forced them to sell even safer assets.
In Europe, Italian bond yields surged when ECB president Christine Lagarde said it was not the role of the central bank to “close the spreads” between 10-year Italian government bonds and German Bunds. The yield on the 10-year German Bund rose from -0.71% to -0.55%, having touched a fresh intraday low of -0.90% on Monday.
Oil (Brent crude) slumped to just above $30 a barrel oil as the price dispute between Saudi Arabia and Russia continued.