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Sunday, 1 March 2020

Global equities markets have worst week since 2008 on covid-19 fears

Global equities markets have worst week since 2008 on covid-19 fears: Global equity markets were a sea of red on Friday as growing fears that a covid-19 pandemic could both stall economic growth and hurt corporate earnings caused investors to dump stocks in what became the worst market sell-off in the US since the financial crisis in 2008.

The worst week for US equities in almost 12 years: Around USD 7 tn has been erased from equity markets around the world since 19 February, with the US market alone losing USD 4.3 tn. The S&P 500 fell 11% during the week and the Dow Jones plunged more than 12% to its lowest level since June 2019. European stocks suffered similar losses, with major indices — including the FTSE 100, the German DAX, France’s CAC 40 and the Euro Stoxx 50 — all losing 11-12.5% during the week, officially entering correction territory. Indices in Asia were not hit quite as hard, with the Hang Seng falling 4.3% and Shanghai Composite 5.2%.

The EGX 30 is proving a bit more resistant, closing down 1.5% on Thursday. The index is now down 6.8% for the full year.

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US treasury yields hit record lows: Investors are piling into safe haven assets, pushing yields on US 10-year and 30-year bonds to record lows. And as yields continued to fall through the floor, the ICE Bank of America MOVE index — a measure of volatility in the bond market — hit its highest level since February 2016, according to Bloomberg.

“Investors are selling stocks first and asking questions later,” Keith Lerner, SunTrust’s chief market strategist, wrote in a note picked up by Bloomberg. “We are seeing signs of pure liquidation. ‘Get me out at any cost’ seems to be the prevailing mood. There is little doubt the coronavirus will continue to weigh on the global economy, and the U.S. will not be immune. There is much we do not know. However, it is also premature to suggest the base case for the US economy is recession.”

US crude posts biggest weekly fall since 2008: Fears that the outbreak will hit global oil demand caused West Texas Intermediate crude to plunge more than 15% during the week, closing closed Friday at USD 45.25 per bbl from USD 53. Brent followed a similar trajectory, falling 14.3% to USD 50 per bbl.

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Powell intervenes to calm the market: US stocks staged a late recovery on Friday after US Federal Reserve chair Jay Powell hinted that the central bank may consider cutting interest rates in response to the outbreak. “We will use our tools and act as appropriate to support the economy,” the statement said, emphasizing the US economy “remains strong” but that covid-19 is presenting “evolving risks” that could necessitate central bank intervention.

Fed likely to resume easing this month: The market is now pricing in a 25 bps rate cut when the Federal Reserve meets on 17-18 March and a further 2-3 similar cuts by the end of the year, Bloomberg reports. Bank of America is forecasting the central bank to make a 50 bps cut in March and Goldman Sachs expects 75 bps in cuts by June. The Fed Funds Rate currently sits at 1.5-1.75%.

What are the chances of an emergency rate cut? “An emergency cut is clearly a growing possibility for a number of reasons — from the hit to sentiment, to the lower oil price, moves in equity markets, risks to the global supply chain etc,” said John Wraith, a rates strategist at UBS Group AG in London.

It may not matter though: Mohamed El Erian, Allianz’s chief economist adviser, told CNBC that the Federal Reserve will not be able to prevent the fallout from covid-19. “You need a lot of cash and very little debt to navigate what’s ahead, because markets will start freezing up even if the Fed cuts rates, which I think it will,” he said. “All that that’s going to do is help balance sheets and give some minor relief to markets. But it’s not going to encourage people to travel. It’s not going to encourage people in China to go back to work.”

Time to scale back expectations for US earnings: There will be zero growth in corporate earnings this year as a result of the virus, Goldman Sachs’ chief US equity strategist David Kostin wrote in a note on Thursday, according to CNBC. The consensus among US banks is that earnings will grow 7% over the course of the year, but Kostin says that earnings will suffer as the Chinese economy deteriorates, hitting demand for US exports, disrupting supply chains and generating uncertainty.

Goldman predicts “short-lived global contraction”: Stopping short of forecasting a full-blown global recession, Goldman Sachs economists have predicted the global economy to go into a “short-lived” contraction, Bloomberg reports. Global GDP is likely to shrink during the first half of 2020 before recovering in the second half, they wrote in a report on Friday.

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