Early this week, stocks reversed losses on global policy stimulus hopes. The Federal Reserve had even surprised market participants by a 50bp rate cut on Tuesday, the highest since December 2008. But such a move between meetings, in reaction to Trump’s tweets, eventually made market participants somewhat skeptical, the latter wondering how this emergency decision could really help overcome supply chain disruption. The epidemic has already caused factories to be closed, flights grounded, and events cancelled around the globe. A deep recession is looming as the number of U.S. and global confirmed cases is growing exponentially leading to containment measures everywhere in the world, the latest affecting Italy where 60 million people are now quarantined.
In this context of great uncertainty resulting in extreme whipsaws (VIX still near the critical level of 42), major stock indices finished the week in different directions. Chinese stocks rebounded strongly (Shanghai Composite up 5.35%). The S&P500 and Nasdaq pared their early gains at the end of the week, in spite of the 273,000 jobs added by the U.S. economy in February (i.e. far more than the 175,000 expected), but managed to remain up 0.61% and 0.10% respectively. By contrast, it was much harder for U.S. small cap stocks (Russell2000 down 1.84%), Japanese and European stocks (Nikkei and MSCI EMU tumbling 1.86% and 3.04% respectively).
It was also a singular week for the S&P sectors with an exceptionally high dispersion of returns: +7.94% for utilities compared with -7.25% for energy but the fact is that oil suffered one of its worst crashes on Friday, falling more than 10% DTD (-7.77% WTD) after Russia refused to back Saudi Arabia on deeper production cuts, putting pressure on U.S. shale drillers by extension. In reaction, Saudi Arabia declared an all-out price war, slashing prices in most regions between US$6-8/bbl, thereby opening the door to a bloodbath at the opening on Monday*. Financials were also in trouble (down -4.08% WTD) as lower interest rates are usually a headwind for banks. Like utilities, the most defensive sectors outperformed the market factor (consumer staples: +6.23%, health care: +4.96%, real estate: +4.75%).
Unsurprisingly, sovereign bonds rallied as monies bounced back into safety and away from the riskiest assets, sending the U.S. 10-Year Treasury yield to a record low of 0.74% and the German Bund yield for the same maturity to -0.71%. The U.S. 3-month T-Bill yield fell below 0.5%. U.S. investment corporate bonds also fared well (+2.19%) while their European peers were virtually flat. High yield bonds were logically hit by the flight-to-quality (-0.95% in Europe, -0.37% in the U.S.) while emerging debt weathered the storm (+1.48% in local currencies).
Last but not least, gold saw a huge rallying (+6.75%) after the correction observed on the last business day of February (-3.6%).
*WTI Futures down approx. 25% on 9th March.
Find the full report here: https://www.trackinsight.com/en/weekly-flow-report