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Coronavirus – What are the risks to the financial markets? UPDATE

For those of you that read my blog posted on 13th Feb 2020 you will recall the caution within the post of what could happen. Little did I realise at the time of writing it that it would prove to be something similar to what has occurred over the last few weeks. Although, I certainly had no idea that global equity markets would react in the way that they have.

I will provide you some level of guidance in this updated version of What are the risks to the financial markets?

One thing I can predict is, volatility, because buying volumes in the financial markets are very thin in many asset classes and it appears that rallies are quickly followed by heavy selling. At least that’s how it seems.

So, we are all pretty much in the depths of this outbreak give or take a few weeks, depending on where you live. I live in London and have been working from home since Thursday 19th March and expect to be here for some weeks. Prior to taking the decision to WFH The City was a proverbial ghost town. Most shops were either closed or planning on closing by this weekend – “what’s the point when no one is in London” many would say. Coffee shops and cafes were all planning on being closed by either Thursday or Friday at the close of business and with the announcement on Friday evening this proved to be was now being enforced by the government.

This is exactly what I suggested in my post of 13th Feb. London in lock-down. Whilst the government have yet to announce an official “lock-down”, this is pretty much where we are. I am not sure of the shopping areas of the West End, but I know that Selfridges closed their doors earlier in the week to protect staff and shoppers from this very disruptive out-break. I’m guessing that it looked no different to The City.

What can we expect from here? I am just going to cover the markets and try and add some useful information that has been released over the weekend.

V shaped recovery – this phrase has been used many times in recent weeks, but it now seems that the letter “V” might be dropped as estimates start to come in as to who this crisis will impact on the global economy. I heard this morning that one investment bank was suggesting that for the second quarter GDP in the US would fall by 30%. This number is three times greater than any other quarter since economic records began. Considering the size of the “lock-downs” across the world it is hardly surprising that we are going to see huge drops in consumption and productivity. So, we are going into a technical recession and it looks more likely that we are heading for a “U” shaped recovery, purely because of the scale of the damage for a short period of time.

What will this do to stock prices? Clearly there are going to be some casualties even in the blue-chip world. Some businesses just won’t be the same again and will need government funding to avoid them going into liquidation. The sectors most under threat are retail and travel although affects will be felt everywhere. Many companies have already scrapped giving any forward guidance and removed dividends. To provide any guidance moving forward would be almost impossible in these unprecedented times. Although the supermarket sector is likely to be one area that might see an increase in turnover as they soak up most of the non takeaway business from the closed outlets in the restaurant world.

Globally stock markets are still struck with fear as scientists are at odds with each other as to how this virus might pan-out and will there be a second wave later in the year as countries start to lift their lock-down policies exposing people to a new risk. So watch China here, they shut down Wuhan after day 4 of the first death and they have been in total lock-down since then and now they are starting to get back to some kind of normal life. Unfortunately, Europe were not quite as draconian as the Chinese and we are now seeing the impact of this in both Italy and Spain. In the UK we wait to see if the Government has been right with their science-based attempt at flattening the curve!

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