Stocks are sharply lower as health fears continue to loom over the markets. 

Europe

The first quarter was dreadful and the second quarter is starting off on a negative note. The Covid-19 related death toll in the US has overtaken that of China, and President Trump has warned about a ‘very, very painful two weeks’ ahead. The surge in stocks seen on the back of various stimulus plans from central banks, and rescue packages from governments around the globe seems like a distant memory, and traders are bracing themselves for a deepening health crisis. Germany has extended the nationwide lockdown until 19 April – it will prolong the economic pain in Europe’s largest country.   

The British banking sector is under pressure today after the Bank of England (BoE) recommended that UK banks should suspend their dividends and share buyback schemes. The BoE also advised the banks not to pay out bonuses to senior staff during the crisis. In these uncertain times, it is prudent to conserve cash. Whenever the economy hits the skids, cash becomes a valuable commodity, so it’s best to have a buffer. RBS, Lloyds, Barclays, HSBC, and Standard Chartered are all nursing losses today as the groups took the advice of the UK’s central bank and cancelled their dividends. Without a cash pay-out on the horizon, the stocks are less attractive to potential buyers, but the banks are taking sensible steps to improve their liquidity positions – which should help them in the medium-term.

It has been a tough few weeks for the airline sector, and today is no different, as the International Air Transport Association (IATA) cautioned the sector could incur a net loss of $39 billion in the second-quarter, should the flight restrictions last for three months. The IATA pointed out that fixed costs and semi-fixed costs in the industry equate to roughly 50% of airlines costs, so trimming expenses might not be easy. Wizz Air and easyJet are underperformers in the sector.  

The house building sector has come under pressure recently as traders fear UK house prices will be hit as the government are not encouraging people to move during the crisis. In addition to that, banks are reducing the number of mortgage products on offer. Taylor Wimpey will scrap executives’ bonuses, and they will take a 30% cut to their salary and pension too during the shutdown. It is encouraging to see that management are leading from the front. Maintaining cash in this climate is sensible too.   

US

The Dow Jones and the S&P 500 are offside today as dealers are rattled about President Trump’s warnings that the health crisis is likely to ramp up in the near-term. The colossal rescue package and the open–ended quantitative easing scheme was announced as a means to tackle the health crisis. It seems like the coronavirus is about to really take hold in the US.   

The ADP employment report for March showed that 27 000 jobs were lost, while the consensus estimate was for 150,000 jobs to have been lost. When you delve into the detail, you realise the situation isn’t as good as the headline would suggest. The update only covers up until 12 March, so it doesn’t cover the most recent effects of the health crisis. In addition to that, medium and large businesses added a collective 63,000 jobs, while small businesses lost 90,000 jobs. Smaller firms will feel the ripple-out effect of the crisis first, and larger companies could be in for pain in the short-term.   

FX

The US dollar has pushed higher today and in turn it has dented EUR/USD. The unemployment rate in the eurozone dipped to 7.3%, while traders were expecting it to hold steady at 7.4%. In relation to the European manufacturing reports, it was a mixed bag, as the Spanish and French updates topped the forecasts, while the Italian and German readings narrowly undershot economists’ expectations. The euro is firmly lower today.   

The final reading of the UK manufacturing PMI report for March was 47.8, which topped the 47 forecast, and keep in mind the flash reading was 48. All things considered, the reading wasn’t too bad. Sterling is slightly lower versus the US dollar – which is enjoying a big rally  – and it is sharply higher against the euro too.  

Commodities

Oil is in the red as demand woes continue to weigh on the market. President Trump will get in contact with Saudi Arabia and Russia in an effort to stabilise the oil market – he’s keen to protect the shale industry. The impact of the lockdowns is evident in the latest Energy Information Administration data. US stockpiles surged by 13.8 million barrels, while gasoline inventories jumped by 7.5 million barrels. Even if Mr Trump brings the Saudi-Russian oil price war to an end, which would be a difficult task, the tumbling demand is likely to drag the energy lower.

Gold is driving higher thanks to the risk-off sentiment. The asset is benefitting from the aggressive sell-off on stocks as traders are channelling funds from equities to gold. The metal traditionally does well when the markets are nervous, and this is a classic example of that. The closure of refineries in Switzerland recently is causing supply concerns too. The rally in gold in light of the stronger US dollar speaks to the metal’s strength, as there is usually an inverse relationship between the two markets.  

For further comment from David Madden, please call 0203 003 8907 or 078 954 50516.

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