Market Update: Taming the Virus

19th March 2020

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Today markets showed slightly more stable performance following another huge wave of Central Bank intervention.

Amongst the changes was a further (largely cosmetic) interest rate cut from the Bank of England to 0.1%. More meaningfully it further swelled its quantitative easing programme by £200 million. It swelled the coffers of its fund to support small business and promised unlimited support to households. Similarly, the European Central Bank added 750 billion euros to its bond buying programme.

All of this provided some stability with the FTSE 100 marginally higher at the time of writing. This is much needed given yesterday saw falls that were dramatic in apparent safe havens. The iShares core £ Corporate Bond ETF saw a 3.75% movement in a day. Only two weeks ago this would have seemed an enormous daily move for one of the major equity markets.

Yesterday we wrote that our best approach to this crisis is to only take risk in the risky assets, keep liquid and focus on the data that surrounds the virus itself. We do not require the last person to be cured in order for markets to recover – but we do require the data to get a little better.

When we analyse this, we must look at how our understanding of this virus has built over the last week. It was on Monday that the UK and US government scrutinised a new report from Neil Ferguson, an epidemiologist from Imperial College. Neil is, as it turns out, a very highly respected epidemiologist and on the basis of his analysis both governments moved to shut down and contain the virus no matter what the short-term economic costs.

The analysis conducted by Imperial focused on the example of Italy – by far the worst hit country per capita. The report also argued that it would take as long as 18 months to fully eradicate the virus and that it may require us to open and then re-shut economies several times as it bubbled up. It is this very serious scenario that governments responded to and the stockmarket has been discounting.

We should note though that it is by no means the only perspective. In the last 48 hours peer reviews of this analysis have started to show that there is a better ability than Imperial foresaw to prevent this re-emergence of the virus. This is as a result of better testing and the promise of a test that can identify antibodies and predict immunity. If one is immune, we can return to society risk free.

All of this means that there is potential now for even only slightly less worse news moving the markets forward. We could see this coming from Italy where the lock-down is now surely reaching a stage where the data would reflect progress. We could also see it in China if evidence builds that as it re-opens its society the virus stays at bay.

This is not intended to sound naïve – much downside risk remains and particularly in credit markets. However, the sun does have a habit of breaking through eventually, markets have a way of picking themselves up, dusting themselves off and recovering.

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