Kuwait: April 07, 2020

NBK Capital: Corona is entering the world market in a state of panic

Kuwait – April: 2020 the month of March saw global markets go into panic mode over the covid-19 pandemic that is sweeping the planet. With the center of the pandemic moving to the United States now after Europe, the total number of confirmed cases globally surpassed the one million mark with tens of thousands of deaths. In the US, where the pandemic is growing exponentially, more than 250 thousand cases have been declared so far. In the meantime, President Trump has warned of “very painful” two weeks at the beginning of April, as infections are expected to peak around mid-April.

The longest running bull market in the history of the United States came to a dramatic end in March. Major indices tumbled into bear territory with the S&P 500 and Dow Industrial Average (DJIA) declining by 34% and 37% from peak to trough between February 20 and March 23. Volatility spiked as the CBOE Volatility Index (VIX) surpassed 85.5, a level last seen during the financial crisis in 2008. For the month, the S&P 500 and the DJIA registered declines of 12.5% and 13.7%, while declining 20.0% and 23.2% respectively for the first quarter. The Nasdaq Composite held better than the broad market, declining 10.1% for the month and 14.2% for the quarter. Treasury yields, on the other hand, continued to sink to all-time lows, especially on the short end. The 2-year yield closed the month at 0.23% down from 0.86% at the end of February, while the 10-year closed at 0.62% down from 1.13% over the same period.

Markets around the world recorded double-digit losses, while central banks and governments scrambled to enact measures that would provide support for their economies amid fears of a deep global recession.

The MSCI AC World Index declined by 13.7% in March bringing its quarterly performance to a negative 21.7%, while the MSCI EAFE saw declines of 13.8% for the month and 23.4% for the first quarter. The Federal Reserve slashed its federal funds rate by 50bps to a range of 1.0-1.25% then by a full percentage point to a range 0.0-0.25% in two emergency meetings on March 3 and March 15. The Fed also announced a massive easing program, which includes an unlimited asset purchase program, a lending program for businesses, and for the first time, a program to buy corporate bonds. On top of this monetary easing program, the US government is finalizing an economic stimulus package that is the largest in US history. A $2 trillion bill that will provide the economy with a massive amount of loans, tax breaks, and direct payments to large and small corporates and individuals. In terms of economic activity, the numbers that were published for March would carry little meaning in terms of reflecting the actual state of the economy due to their lagging nature. Of the number announced so far and that would give a glimpse of how the lockdowns are affecting the US economy is the initial jobless claims for the week ending March 20, which shot up to 3.28 million from 282,000 the previous reading then recorded 6.65 million for the week ending March 27 shattering all expectations, while the Nonfarm payrolls for March, representing new jobs created by the US economy, plummeted to a negative 701,000. In the meantime, the unemployment rate ticked higher to 4.4% from 3.5%. It is worth noting here that these numbers still don’t reflect the full picture of the economic reality which will become clearer in the coming weeks.

The picture in Europe wasn’t any better during March where Italy, Spain, France and Germany were at the center of the global coronavirus pandemic. Travel bans across the globe including that to the US from Europe in addition to the underwhelming policy response from the European Central Bank pushed European markets further into negative territory during the month. The Stoxx Europe 600 fell by 14.8% to end the first quarter of the year down 23.0%. The German DAX and French CAC 40 dropped by 16.4% and 17.2% during the month to record declines of 25.0% and 26.5% respectively for the first quarter.

Prior to the pandemic-induced market rout, the European economy was growing modestly. GDP estimate for the fourth quarter was revised up to 1.0% year-on-year from 0.9% previously, compared to 1.2% for the two previous quarters. All economic indicators are, however expected to increasingly show significant declines. The Markit Manufacturing PMI declined to 44.8 in March compared to 49.2 a month earlier, but this level is still far from reflecting the full effect of the current crisis. The market is generally expecting much worse statistics to come out in the coming few weeks. The same applies to the UK were the FTSE 100 plunged by 13.8% during March recording a quarterly decline of 24.8% for the quarter.
In Emerging markets, the slump was generally more severe especially outside Asia. The MSCI EM Index declined by 15.6% during the month and 23.9% for the first quarter, whereas the MSCI Asia ex-Japan declined by 12.2% in March and 18.6% for quarter. The hardest hit markets during the month were Brazil’s Ibovespa Index with a decline of 29.9% followed by India’s Nifty 50 which lost 23.3% during the month. Elsewhere, Turkey’s Borsa Istanbul 100 was down 15.4% and Russia was 9.9%, whereas Mexico and Taiwan were down 16.4% and 14.0% respectively.

In the GCC, equity markets sustained heavy losses during the month pressured by the global fallout of the coronavirus pandemic and by the unprecedented drop in oil prices which was triggered by the collapse of the production cut agreement. The collapse of oil prices was further compounded by concerns of significant demand declines for oil triggered by the worldwide drop in transportation activities as many countries moved into lockdowns in an effort to stem the spread of the pandemic. The S&P GCC composite lost 17.7% during March compounding its first quarter losses to 24.8%, while the S&P Pan Arab Index recorded declines of 18.6% and 24.8% for March and Q1 respectively. Dubai’s DFM General Index and Abu Dhabi’s ADX General Index topped the list of decliners with 31.6% and 23.8% for the month respectively. Kuwait followed with The Boursa Kuwait All Share Index down 20.6% and the Premier Market Index down 22.8%. Bahrain’s All Share Index and Oman’s MSM 30 index, on the other hand, recorded losses of 18.7% and 16.5% respectively, while the Qatar Exchange Index was down 13.5%. Elsewhere in the Middle East, Egypt’s EGX 30 dropped by 26.3% while the Morocco’s Madex was down 21.3%.