Markets Weekly

20 March 2020

4 minute read

Week ahead

The global impact of the spreading coronavirus pandemic remains the focus for markets as we approach the end of March. That said, key macro data and economic news are also on investors’ watch list.

In the eurozone and UK, March’s IHS Markit flash purchasing managers’ indices (PMI) will be published from the start of the week. The services sector is likely to exhibit signs of weakness as a result of drastic measures from the outbreak. Indeed, the dominant services sector in the US slipped into contractionary territory in February.

Furthermore, March flash data on Friday is likely to see further weakness as consumers avoid travel, retail and leisure activities due to the coronavirus outbreak. In China, whilst some stabilization is probable, especially as the number of cases outside of China now exceeds those within it, a sharp acceleration seems unlikely for now.

The Bank of England (BoE) will likely watch the UK PMI flash data and retail sales, the latter being out on Thursday, ahead of their 26 March meeting for any imminent signs of weakening in the economy. February retail sales data will provide the first official data insight into the services sector as Covid-19 entered the UK.

The BoE has followed the US Federal Reserve, cutting rates by 60 basis points to 0.1% over the past two weeks in what the Governor believes to be the effective lower bound. On top of that the BoE increased bond purchases to £645bn from £200bn.

In addition, investors will monitor the 2019 final Q4 gross domestic product reading for the US to assess the health of the economy before the Covid-19 outbreak.

Chart of the week

Diversification remains golden

Gold is known for its safe-haven characteristics. It is therefore a welcome portfolio diversifier given the extreme uncertainty seen in financial markets as a result of the Covid-19 outbreak.

Over the past few weeks, the corresponding downturn seen in the gold price with equities entering bear market territory is a worrying sign (see chart). The move appears to be the result of investors fleeing to cash for liquidity and selling all their investments, causing all asset classes, not just gold, to struggle. It is likely that as investors return, they will remain risk-averse, supporting the rare metal.

Furthermore, even with the fall, gold is outperforming the S&P 500 by 23.8% so far this year. With central banks providing significant monetary support and lower real rates, the opportunity cost of holding the precious metal continues to fall.

Chart of the week

Coronavirus outbreak: now for the reckoning

As the authorities unveil sizeable fiscal and monetary responses to Covid-19, can the economy avoid a recession this year?

Previous editions of Markets Weekly

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