By Jan Faure
Markets rallied off aggressive global stimulus measures and optimism that most major economies will reopen for business in May.
US markets led the charge in April as investors bet that global stimulus measures will be enough to revitalise economies, and as the COVID-19 pandemic began to slow. Technology companies led the rebound with tech giants Amazon, Apple and Alphabet all making strong gains. Volatility is still extremely high as markets try interpret and digest masses of conflicting information daily.
Gilead Sciences was one American company frequently in the headlines after a government-run clinical trial evaluating Remdesivir, its experimental COVID-19 treatment drug, met the study’s main goal. The announcement stirred hopes that pharmaceutical companies were making progress toward a treatment of the disease.
At a time when the world is facing a crisis not seen or imagined by many, an event occurred that would have been deemed impossible by all. On Monday the 20th April, the May contract for West Texas Intermediate crude (WTI) on the New York Mercantile Exchange traded, and closed, in negative territory.
WTI is US crude oil stored at Cushing, Oklahoma, the main storage facility for oil in the US. Negative prices imply that anyone holding an oil contract would have to pay someone else to take that oil off their hands. Why would they do that? The main reason is a fear that crude storage facilities will not have capacity as a glut of crude fills up available storage. This glut has been caused by a massive and unprecedented decline in demand for oil largely due to the effects of Covid lockdowns on fuel demand. Oil contracts further out point to expectation of a recovery in demand as economies move past the pandemic shutdowns and economic activity revives in the second half of the year.
Economic data is starting to come through that is reflective of a global economy in a fragile state. US economic growth in the first quarter shrank by 4.8% on an annualised basis. The second quarter in the US, and elsewhere, will likely be worse. The coronavirus pandemic has already cost more than 30 million jobs in the US. The worst level unemployment in US history was 25% in 1933 at the height of the Great Depression. Economists currently predict US unemployment will reach at least 15% in the coronavirus induced economic fallout, with some estimates as high as 22%. Unemployment figures are an important barometer for a crisis - the higher it is the harder and longer it will take for an economy to recover.
Despite the April rebound, there are still many risks facing investors. It remains difficult to predict the decisions that governments around the world will make going forward. There has been no unified approach to tackling the virus and managing the various ramifications. This has resulted in countries having varying mortality rates as well as economic impacts. The approach to containing the virus has differed around the world, and the approach to reopening economies will differ as well. It is a certainty that some countries will do better at combatting the virus than mitigating the negative economic consequences that go with it, and vice versa.
It is important to acknowledge that every market crash in history has presented an opportunity for investors. This does not imply that people should buy everything in sight. What is challenging about this crisis is estimating the extent of the economic damage and the time that it will take to recover. This is difficult because we can’t yet determine when the pandemic will either end or be under a level of control that allows businesses to return to normal (new normal). As a result, from an investment perspective we advocate continued caution when investing, while opportunities should be taken in a measured manner.
GLOBAL INDICATORS: Local reporting currencies