Rate cuts, oil and stock markets – our latest views

The Bank of England has followed the Federal Reserve in cutting rates. Volatility remains high as markets continue to digest the oil price fall and the spread of coronavirus. We remain vigilant during this period of turbulence.

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Mar 12, 2020

The Bank of England surprised markets with its Budget-day rate cut, announced this morning before markets opened.

The Bank cut its leading rate from 0.75% to 0.25%. In addition to the cut, the bank introduced measures to support lending to businesses, stating this would "help reinforce the transmission of the reduction in Bank Rate to the real economy".

Initially the FTSE100 rallied and sterling fell.

The rate cut comes ahead of the Government's first Budget, to be delivered this afternoon by Chancellor Rishi Sunak, which is expected to include further supportive measures.

Tuesday saw global markets remain volatile following the steep declines experienced worldwide on Monday. These were triggered by Saudi Arabia’s decision over the weekend to boost oil production in an aggressive move to target market share. The oil price fell by almost 30%.

Steep falls for the FTSE 100 and S&P 500 in recent weeks

Twin impact of oil price shock and coronavirus uncertainty

There may be further market weakness ahead as investors attempt to gauge the impact of both the coronavirus and the oil price collapse.

The spread of the virus was already casting uncertainty over the outlook for economic growth and corporate earnings. The oil price fall is causing investors to reassess the prospects of companies and economies heavily exposed to oil production.

The other area of stress is in credit markets, with investors increasingly concerned about the ability of businesses to meet their obligations and refinance themselves. This has led to a very sharp widening in credit spreads (the additional price that businesses pay for borrowing, over and above the price governments pay). This is especially the case for lower-grade credits. It also has a knock-on effect for the banking sector, where there is increased concern over defaults.

Oil prices collapse as Saudi Arabia increases production

Central bank and government support

While uncertainty is high and negative sentiment likely to persist, we anticipate further action from central banks and governments around the world.

In the short term some of these measures could heighten volatility, although over time we would expect them to help markets and economies. Different economies and markets may experiment with different measures before the right policy mix is found.

Our investment positioning

Heading into this year our portfolios had weightings in gold and other alternative assets. These positions reflected our concern that segments of equity markets were highly valued.

Our stance has served well in recent weeks and acted as a shield from the worst of the falls, despite our underweight position in fixed interest.

We remain vigilant during this period of turbulence. We will be watching closely for market responses to authorities’ measures and monitoring a range of indicators of market sentiment. This is to enable us both to preserve asset value and potentially take advantage of opportunities that will emerge.

This article is issued by Cazenove Capital which is part of the Schroder Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

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Cazenove Capital

Cazenove Capital is the wealth management arm of Schroders in the UK and Channel Islands, providing investment management services to private clients, intermediaries and charities. The company’s strength is founded on the lasting relationships built with advisers and their clients, combined with access to the global expertise of the Schroders group. The DFM team has worked closely with financial advisers for 17 years meeting their individual requirements and supporting them in providing discretionary fund management to their clients.

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