After largely ignoring the apparent threat posed by the coronavirus, investors entered panic mode as the implications of the outbreak on the global economy became clearer. In the worst week for markets since the financial crisis of 2008, shares all around the world suffered a major correction. While some sectors will inevitably be hard hit by the measures being taken to limit the spread of the virus – like airlines and hotels – the selling pressure was indiscriminate.
There is an old stock market adage that says shares always overreact – in both directions. The swift and significant bounce that we saw at the beginning of the week following the correction bears witness to this. But it is still too early to assess the real implications of what is going on as whole cities are put into lock down, most notably in China. Some companies have already warned of supply chain disruption. Apple has said its trading results would be hit, but their shares were amongst the biggest risers when buyers re-entered the market.
The likely consequences for the global economy are so dominating sentiment at present, it is hard to find other issues that might affect the way shares behave. Oil has retrenched in anticipation of lower demand and gold has received a boost, reflecting its safe haven status. In the foreign exchange markets, the US dollar has been in demand, unsurprisingly, while sterling has suffered, though this is down to fears of a hard Brexit. Quite how these markets will react when countries start down grading their economic forecasts is hard to assess.
We can be certain that central bankers to be more accommodating as they endeavour to stave off the worst effects of this current crisis. Indeed, the Fed has already cut interest rates by 50 basis points, though whether investors should cheer or fear this move is far from certain. Indeed, it may make little difference to US economic performance in the near term. Back home, Bank of England Governor, Mark Carney, has warned of a significant economic shock, though he expects it to be of a temporary nature. We must all hope that he is right and the uncertainty will be short lived. In the meantime, though, we must expect continuing volatility.
