The recent outbreak of the novel coronavirus in China weighed on financial markets this week, with equities declining as the virus continues to spread at an alarming rate. As it stands, there have been around 8,000 confirmed cases of the virus across 18 countries and a current death toll of 170. Deaths and cases are likely to rise until the outbreak is contained. Authorities are attempting to contain the outbreak by suspending public transport and restricting movement in and out of cities across China. Attempts to restrict the spread of the virus have now become a global effort, with governments across the world tightening international travel and border crossings with China.
Fears that the outbreak could disrupt travel and commerce amid already slow economic growth sent a chill through global risk markets, hitting Asian stocks particularly hard, depressing commodity prices and sending investors into safe havens like US Treasuries.
For further information on the Coronavirus outbreak and its impact on markets, please see the attached Market Update document.
BOE Rate Decision
The fate of one of the Bank of England’s more tricky interest-rate decisions hung in the balance in the run up to the January MPC rate announcement today. Traders were pricing in a 60% chance of a cut, whereas economists were more cautious with the consensus view, predicting a 6-3 vote to keep the rates on hold. The outcome was less interesting however, as policy makers voted 7-2 to keep rates on hold at 0.75%, an unchanged split from their previous meeting. The committee noted that surveys of business activity have picked up since Prime Minister Boris Johnson’s election victory removed much of the near-term uncertainty related to Brexit, supporting our view of a post-election pick-up in growth.
- What’s Next?
Officials signalled easing may be needed soon, cutting their GDP forecasts to the lowest level since the global financial crisis and predicting that inflation will only return to target by the end of 2021 if rates are cut to 0.5% in the next year. Mark Carney also stressed that the updated economic projections assume “an immediate but orderly move” to a new “deep free trade agreement” with the EU at the end of the year.
Our view is that accelerating growth thanks to the post-election boost combined with an increase in fiscal stimulus in the March budget will mean the Bank of England will refrain from easing in the short term. However, if EU trade talks struggle or the economy shows signs of weakness, then the case for a rate cut sooner rather than later would become stronger.
Fed Rate Decision
After cutting rates by a total of 75 basis points in 2019, and with downside risks appearing to recede, the Fed kept interest rates unchanged at a range of 1.50% – 1.75% at their first meeting of the year as they assess the lagged impact of prior rate cuts on economic activity and inflation. In the policy statement by the FOMC, the stance of monetary policy is still described as “appropriate”, and it reiterates that officials are continuing to monitor the implications of information on the economic outlook, including global developments and muted inflation pressures, as it assess the appropriate path for the target range. The central bank is likely to remain in this wait-and-see policy stance until the economic outlook changes materially, no matter what President Donald Trump – who just this week called for lower rates again – may want.
- Federal Reserve Balance Sheet
Investors were looking to the Fed this week to seek clarity on how much it may expand its balance sheet following the central banks efforts to restore order to short-term funding markets.
The Fed has been buying US Treasury bills at a rate of $60bn a month since last September and chairman Jerome Powell has faced sharp questions about how its actions are affecting markets.
The Fed announced it will continue to purchase Treasury bills through to mid-June and conduct large repurchase agreement operation at least through April and will target a minimum level of $1.5 trillion in bank reserves. However, Fed Chair Powell indicated that the central bank does intend to gradually reduce the amount and frequency of the repo operations and implied an end to bill purchases in June. That said, he most importantly said the Fed will continue to closely monitor liquidity conditions in the repo market and will adjust plans as needed suggesting the Fed will be sensitive to market stresses and could continue to err on the side of accommodation to avoid tightening of financial conditions.
As it stands, with data continuing to support our expectations for a gradual improvement in the economic fundamentals, we remain cautiously optimistic, and are currently in wait-and-see mode for more evidence that the global economic outlook is brightening. We continue to look for opportunities as part of our staged re-entry into specific areas of equity markets, and we are poised to act as and when they arise. As it stands, the recent coronavirus outbreak has not impacted our outlook, and we expect the initial panic in financial markets to be unwound over the coming weeks. Should global equities continue to decline, this could present us with a buy in opportunity, causing valuations to become more in line with company fundamentals. For this reason, we will be watching the re-opening of Chinese markets and the unfolding situation in Asia very closely this week.
Key Events We Are Watching This Week:
- Friday: Chinese Manufacturing PMI, Eurozone GDP data
- Monday: Chinese Markets reopen after lunar New Year holiday
For anyone who wants further data to substantiate the position please review the attached Global Economic Update document and the Economic Dataset below.
Model Portfolios & Indices
Global equity markets declined over the week, with concerns over the coronavirus outbreak in China weighing on investor sentiment. The OBI portfolios remain defensively positioned in comparison to normal market conditions, and we continue to closely monitor the data, looking for opportunities as they arise. The portfolios declined over the week as concerns over the impact of the outbreak on growth weighed on sentiment and earnings calls, however the defensive element of the portfolios performed well, meaning that the portfolios declined by less than the more equity heavy benchmarks.
Please note that the YTD data in the table below reflects performance from the start of the new year.
The data above will not directly correlate to the indices as there is always a delay in pricing because the US markets close significantly later than the European markets and the Asian markets. The data set above reflects the last close and much of the day’s movements will not yet be reflected in the portfolios due to pricing delays. You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in price or value and you may get back less than the amount originally invested.
Past performance is not a guarantee of future performance. Performance figures quoted include the fund manager charges but exclude other fees such as adviser, custodian, switch and/or discretionary investment management fees. Unless otherwise instructed and accrued, income is reinvested into the portfolio.
This Day in History
On this day in 1649, King Charles I was beheaded for treason. Charles ascended to the English throne in 1625 following the death of his father, King James I. In 1642, the bitter struggle between king and Parliament for supremacy led to the outbreak of the first English civil war, which ended in him being convicted of treason and sentenced to death.
Have a great week,
Jason & Gina