The past week was a wake-up call for investors who had assumed the smooth ascent of global stock markets would stretch into 2020.
The resolution of at least some tensions over global trade between the US and China at the end of last year had set expectations for a decent, if unspectacular year of global economic performance and stock market returns — supported by easy monetary policy. Even a flare-up in geopolitical stress with Iran in January had failed to dent prices for long. Warnings over the potential spread of the coronavirus last month had generated only mild pullbacks.
But last weekend, when Italy quarantined 10 towns in an effort to limit a breakout there, many traders started to consider for the first time that a heavy market sell-off could be just around the corner.
“When it was mostly in Wuhan and China, there was a hope that it could be contained,” said one senior bond trader. “But over the weekend everyone was talking to each other about it, and everyone knew the market opening on Monday would be grim.”
So it proved. Global equities slumped by nearly 3 per cent on Monday, government bond yields shuddered lower and the price of gold rushed higher as investors belatedly scrambled for safety. Unusually, declines continued every day.
Over the week, the FTSE All-World lost almost 13 per cent, wiping out six months of gains, and lopping nearly $6tn off the value of global equities. In nominal dollar terms, that makes the last week the worst for stock market wealth destruction ever recorded. The Nasdaq lost $4.6tn in the entire post-dotcom bubble collapse in 2000-02.
The flipside was a mighty rally in haven assets. The US government bond market — investors’ favoured retreat at times of distress — saw the yield of both 10-year and 30-year US government debt hit record lows.
James Athey, a fund manager at Aberdeen Standard Investments, said the scale of the shake-out reflects both the severity of the virus’s economic impact and the lavish valuations that had become commonplace in key stock markets.
Since January, he had been loading up on safer government bonds, fearing that equity markets were locked in a “mad utopian vision” of uninterrupted economic growth and low interest rates, and ignoring the dangers that the coronavirus posed.
“Central banks have created this world. It had become a market where there was too much pointing in the same direction,” he said. “Everyone has had the same trades on, and they are all wrong.”
Luca Paolini, chief strategist at Pictet Asset Management, said equities were “finally reflecting a more realistic probability of global recession”, adding: “The risk of an outbreak of the virus in the US was a game-changer because US stocks are so massively overbought and very expensive.”
Some investors had predicted the sell-off. Peter Oppenheimer, Goldman Sachs’ chief global equity strategist, had last week warned that the combination of stretched valuations and the impact of the coronavirus meant that a “near-term correction is looking much more probable”, and spent much of this week on the phone with skittish clients.
On Wednesday, Mr Oppenheimer told the Financial Times that the sell-off could deepen as investors grappled with the potential implications of the coronavirus spreading even further. “This is a disruption, and unlikely to derail the underlying trend of growth. But markets could easily overshoot, and start pricing in a far worse scenario,” he said.
Throughout the week, analysts ripped up their forecasts and started pencilling in gloomier predictions for global economic growth and corporate profits. By Friday, 31 of 36 economists polled by Bloomberg had cut their forecasts for 2020, for an average global growth prediction of 2.8 per cent. That would be the most sluggish pace since the financial crisis. China’s growth rate is expected to fall to 5.5 per cent, the most sluggish pace since 1990, according to Bank of America.
As a result, traders are now heaping pressure on central banks to ride to the rescue again. Fed funds futures — a kind of derivative used to bet on US interest rates — imply that the Federal Reserve is now expected to trim rates next month. Indeed, it indicates that traders think there is a chance of a larger-than-usual cut of half a percentage point.
However, Mr Oppenheimer frets this may not be enough to assuage investors. “Markets are almost forcing the Fed’s hand, but I’m not sure it will help, as it’s now being priced in,” he said.