COVID-19 update: effect on equities and bond markets

The impact of the novel Coronavirus outbreak has played out in an unprecedented manner on stock markets over the past few weeks, with large falls, extreme volatility and rapidly changing conditions across the major markets. This is unlike any crisis we’ve witnessed over the past few decades, with movements of more than 5% on a daily basis.

It's difficult at this stage to predict how far this situation might run for the global economy, as we wait for critical data to feed in. We’re closely watching key weekly indicators, such as purchasing manager indices in manufacturing and services. We expect these to deteriorate significantly in the coming weeks due to the effect of containment measures on economic activity.

March quarter GDP results, whilst capturing some of the current global situation, will primarily reflect the shutdown in China, which accounts for 20% of the global economy. 50% of Chinese production will have been shut down for most of the quarter, which we expect will cause a hit to Chinese GDP growth in the order of 3-5%.

Although the number of new cases in China has clearly peaked, June quarter GDP figures will encompass the full extent of the developing pandemic, and it is unlikely that the virus will be contained in Europe, the US and in other centres of the outbreak by the end of that period.

Shares react violently and belatedly

Equities markets were initially quite resilient to the COVID outbreak whilst it was contained to China. Whilst there may have been some depressing effect, overall investors remained optimistic amidst low bond yields and healthy corporate earnings growth in the early months of the year.

Local markets are now down 30%, with more to come as the upswing in new cases across the West continues, and a sustained recovery is unlikely until we see a peak in new cases in those places most affected.

Effects on bond markets less clear

Movements in bond yields in relation to the outbreak have been more difficult to analyse. Yields reached a record low over the past week, yet have been supported in the last few days despite significant monetary easing from central banks, possibly due to liquidity issues in the fixed-income market. Nevertheless, we expect that bond yields will remain at or close to these record lows for the near term while the situation continues to unfold.