Market Analysis

The Week Ahead 30Mar – 3Apr: Investors Take Solace From the Fed

Financial Markets around the world calmed down after the FED announced additional measures to counter the economic damage wrought by covid-19. Bank of Canada also announced that they will be lowering interest rate to shield their economy from the current calamity. Governments rushed out fiscal stimulus programs that in some cases came in at close to 10% of GDP. Never willing to pass on a chance to fashion a catchy acronym (remember “TARP” during the 2008 financial crisis?), the U.S. Congress agreed on the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to the tune of $2 trillion U.S. As investors gauge the relief measures being put in place, the expectation of a robust recovery in the second half of the year remains the consensus view.

Stocks markets had a relief rally but lost steam towards the end of the week as US reported more cases of infections as compared to Italy and China. Earlier in the week, the Dow Jones Industrial Average posted its biggest one-day gain since 1933. Toronto’s S&P/TSX Composite Index saw a jump of more than 20% in just two trading days. Meanwhile, economic data releases – most of which were rendered meaningless in recent weeks due to the rapid evolution of conditions and the lag in reporting – began to take on relevance again. Staggeringly high weekly unemployment claims in both Canada and the U.S. started to provide a picture of the magnitude of the economic slowdown.

Oil prices has plummeted to new lows with supply increasing (saudi arabia increased supply of oil) and demand decreasing (demand side taking a hit from Covid-19) concurrently. Experts are suggesting available storage will run out by June, putting even more pressure on prices. Gold had a good week, which was taken as a positive sign for capital markets in general. The unusual selling pressure bullion prices experienced last week was attributed in part to investors forced to sell in order to cover losses in other, less liquid, assets. Gold’s recovery is seen as a sign that the extraordinary actions of central banks to inject liquidity in markets is having the desired effect. A retreat in the U.S. dollar was another sign of reduced stress in financial systems. Government bond yields fell, but settled into a relatively tight range compared to the dramatic swings seen in the preceding three weeks.

Most major equity markets in Europe and Asia made gains. The European Central Bank was among the central banks eliminating limits on its bond purchase programs, and even traditionally fiscally conservative Germany moved towards a significant stimulus program. A massive stimulus proposal gave a strong boost to Japanese stocks, despite the confirmation of a one-year delay for the Summer Olympics in Tokyo.

Volatility in global asset prices is likely to remain elevated for some time, but the market action this week suggests the worst of the uncertainty, at least in terms of policy response, may now be behind us. Investors will now focus on the path of COVID-19 infections as the determining factor in the sustainable recovery of the economy and earnings.