Plenty to test markets’ mettle in the year ahead
I remember sitting in a meeting back in January, when a colleague asked about the potential market implications of the “Wuhan Virus”. You don’t often get silences in a room full of traders, but this was definitely a “you go first” moment. When the conversation did resume, it focussed on prior health catastrophes such as SARS, Ebola and Swine Flu, the consensus being that the economic implications of this new virus would be similar and would remain largely contained within the APAC region. We were wrong. Badly wrong.
The Covid-19 virus spread rapidly across the globe and in March the WHO declared a global pandemic. Governments have attempted to curb the spread through travel restrictions and lockdowns, but sadly, this has not prevented over 78 million people contracting the virus and over 1.7 million deaths.
In addition to the human cost, the economic cost of Covid-19 has been devastating. Millions of businesses across the globe have shut down, or are relying on Government assistance for survival. The IMF expects Global GDP to fall by approximately $6.2 trillion this year, making this the deepest economic recession ever. The labour market is now a massive concern. Here in Ireland we have approximately 187,000 people officially unemployed, but on top of that, we have a massive 350,000 people in receipt of the Pandemic Unemployment Payment (PUP). The economic success or failure of the next few years depends on the destiny of these PUP recipients and their counterparts all across the globe.
Given the economic devastation and our very uncertain future, I’ve been surprised at the resilience of equity markets this year. While global stocks fell 34% in February and March, they have recovered impressively since then and are now up 12% on the year. For most of the last ten years, stock markets have had monetary policy makers in their corner, but now that fiscal policy makers have also joined that corner, it has boosted confidence and ignited what John Maynard Keynes referred to as “animal spirits”.
Probably more than any equity recovery in the history of financial markets, this one has been supported by the retail sector. With many electronic brokers now offering zero-fee platforms, and a huge rise in the number of employees working remotely, retail activity has increased massively. Overall, this is a good thing, but at times it can cause heightened volatility in a relatively small pool of hotly-tipped shares.
Imbalance has been another key feature of this equity recovery. Due to the nature of the crisis, we have seen tectonic shifts in the business landscape, with Nasdaq darlings, such as Tesla (+652%), Zoom (+488%) and Moderna (+653%) rocketing in value, while the likes of Hertz, JC Penney, Cirque du Soleil and thousands of smaller companies have filed for bankruptcy. As most business owners know, fate is a cruel mistress, and if your company requires customer footfall and you have survived 2020, you have done extremely well.
After a few years of range trading, dollar volatility has spiked again this year. A sharp rise in the first quarter was short-lived and the dollar has dropped significantly since then. This can be attributed to a number of factors including; FOMC rates cuts, average inflation targeting, further asset purchases and a deepening of their twin deficits. The US Dollar is down over 6% against its main trading partners, and against the Euro, which has been strong this year, the Dollar has weakened from 1.12 to 1.22.
Strange things can happen when markets become panicked and illiquid, and in April we saw some unprecedented moves in oil futures. With demand evaporating and storage costs soaring, traders with long positions were forced to sell into a bid-less market in West Texas Crude futures, driving the price all the way down to a historic low of minus $37 per barrel.
With the dollar weak and fear elevated, gold has had another strong year, rising 23 %, but it has been significantly out-shone by Bitcoin, which has risen over 200%, to $23,565. I remember raising an eyebrow back in August, when I read about MicroStrategy investing $250 million of the company’s cash in Bitcoin. Typically, a company would need to keep reserves that are both liquid and low-risk and Bitcoin is neither. But since then, Bitcoin has rallied hard and MicroStrategy’s cash reserves have almost doubled in value, so its decision has been vindicated.
Looking ahead, there’ll be a few important items for investors to watch in 2021. The battle against Covid-19 will continue to be a key driver of markets. Do the vaccines perform as hoped? Can they neutralise new strains of the virus? Can they be rolled out speedily and effectively? If we don’t get positive answers to these questions, the risk asset rally of the last 9 months could unravel.
US Politics will be another key focus. Biden’s proposed cabinet looks strong and diverse, with a good mix of Obama era experience (Janet Yellen & John Kerry) mixed with some fresh faces (Pete Buttigieg, Katharine Tai). Their policies around trade, corporate tax, anti-trust, net neutrality and climate will all be critical for markets.
Despite all its short-comings, 2020 was the most environmentally friendly year planet earth has seen for quite some time and with investment in the sustainable fund industry growing rapidly, and the US set to re-join the Paris Accord, our future at least looks greener than it did pre-Covid.
With regards to Brexit, it’s encouraging that a trade deal was finalised on Christmas Eve, but the UK and her trading partners still have some formidable barriers to overcome to maintain GDP levels.
2020 has been a sad and brutal year. Like a never-ending hurricane storm, Covid-19 has left a trail of destruction in its wake. With the exception of a world war, it would be hard to envisage a single event that could have such a profound and fundamental impact globally on all our lives. We have had our mettle tested and the pain will linger long, but as we approach 2021, with at least some vaccine optimism, the lyrics of an old song come to mind.
When you walk through the storm, hold your head up high and don’t be afraid of the dark, for at the end of the storm, there’s a golden sky and the sweet silver song of the lark.
Head of euro money markets at Bank of Ireland