AG Macro Brief - 26 Feb 2020
Apologies to all. I have been off the markets for personal reasons but glad to be back. In a situation like this, it is tough to get a good handle but we need to start somewhere.
The market is undoubtedly stunned and gripped with fear over the coronavirus pandemic. As FDR quipped, “the only thing we have to fear is fear itself”. Loaded words of wisdom.
A three digit decline in the Dow doesn’t carry the significance that it would have ten years ago, given the value of the index but its still very important. The last time we had a three digit decline in the Dow was a little more than two years ago .
Markets go up by the staircase and comes down by the elevator.
To put it in perspective, the concern at that time was inflation. The bond market was telling us that inflation and interest rates were about to reset higher. At that time, the 10 year bond yield was trading 2.88%. From experience, we know that those fears were unfounded. Now, the ten year yields are at all time lows.
In each of the prior cases, where we were faced with matters of grave concern, the central banks responded strongly. In Europe, Draghi effectively said the ECB won’t let Italy and Spain default. He did the unimaginable by becoming the buyer of Spanish and Italian government bonds of the last resort. And in the case of Brexit, all central banks were ready to act when the surprise vote hit the markets in June 2016 .
So what is our major fear now? It is the risk of the coronavirus contagion. The fear of the unknown. What will central banks do collectively to shore up the confidence in the markets? Will central bank actions be still enough if supply chain, travel and other disruptions continue to drag down the global economy.
Just think about one of the major global events scheduled this year: The 2020 Tokyo Olympics in July-Aug. Since the inception of modern Olympics in 1896, it has been canceled only during wartime and that was in 1940 in Tokyo. It was called off due to its pending war with China and World War II . The Rio games in Brazil went on as scheduled in 2016 notwithstanding the outbreak of the Zika virus. If the situation of the coronavirus worsens beyond May, I think there is a strong chance of the Olympics being cancelled. That will be a massive blow.
Will update you on specific markets later in the day as it needs more analysis.
Happy Hunting!
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.