WHAT HAS BEEN THE IMPACT TO DATE?
From the 20th of February we have witnessed a synchronized sell off across global financial markets and asset classes on the back of fears around the spread of the Coronavirus and what it could mean for global growth and activity. The extent of the slowdown in global growth and how long it will last coupled with the negative impact it may have on supply chain is what is unsettling global markets. Adding further salt to the wound is the clear market share wars between Saudi, Russia and shale gas producers that is currently playing out in the oil market.
Central Banks globally are either cutting rates and/or providing stimulus packages. Markets are however not seeing this in a positive light as markets continue to spiral lower on the back of these cuts or stimulus measures pricing further deterioration in the underlying economies growth prospects. Where does that leave us? There is clear panic and severe market reaction with the current pull back being one of the sharpest we have seen in recent history. Several global activity indicators are pointing to severe global slow-down. A full-blown global recession will however be dependent on how long we remain in this situation of reduced activity. What is therefore critical to get on top of is how sustained or protracted demand destruction is going to be at a micro level and the impact of that at a fiscal or macro level. This in turn will be dependent on the rate of increase in infections globally and the consequent shut down of various economies.
The markets seem to be fearing the worst, this is evident by the fact that over the last 3-4 weeks we have seen sharp and highly correlated moves across asset classes with market volatility reaching its highest level in the last 30 years (Figure 1). The speed at which markets are reacting points to the fact that there are still significant unknowns within the system.
