Mark Lister, 9 March 2020

The roller coaster ride for global financial markets continued last week. Equities swung wildly between positive and negative territory and bond yields and interest rates collapsed to new record lows. The S&P 500 in the US had an extremely volatile week, rallying by more than 4% on Monday and Wednesday but suffering heavy losses on the other three days. The index managed rally into Friday’s close, which saw it finish the week 0.6% higher. The last two weeks have provided a wild ride for investors, with US shares moving by more than 2% (in either direction) in seven of the past ten trading days.

The S&P 500 index is now 12.2% below its peak, although it remains 7.2% higher than it was 12 months ago. Smaller US companies have suffered sharper losses, with the Russell 2000 15.0% below its peak and down 5.7% compared with this time last year. Australian shares were down 3.0% last week, while the UK and Europe fell 1.6% and 2.4% respectively. The local market has performed better, with the NZX 50 rising 1.5% last week and the index just 5.4% below its record high from two weeks ago. The top NZX 50 movers last week were Chorus (+13.9%), Spark (+8.7%) and Skellerup (-7.8%), while Kathmandu (-10.2%), Air New Zealand (-9.3%) and Refining NZ (-8.2%) were the worst performers.

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The moves in bond markets have been nothing short of spectacular. The 10-year US Treasury yield finished the week at 0.77%, having declined to 0.66% at one point. That compares with 1.15% just a week ago and 1.92% at the end of last year. Similarly, the New Zealand five-year swap rate ended last week at 0.77%, well down from 1.45% at the beginning of the year.

Gold had another strong week, rising 5.6% to a seven-year high on the back of haven buying. In contrast, oil prices fell 10% on Friday after OPEC failed to agree on production cuts. US crude has slumped 31.7% so far this year, which has seen the energy sector in the US tumble 37.4% from where it peaked in 2019.

Markets will continue to obsess over coronavirus headlines this week, although the ECB meeting on Thursday will also be a key event on the global economic calendar. Markets will be watching to see if the Bank follows the lead of other central banks and provides some sort of economic stimulus. ECB President Christine Lagarde said last week the ECB was ready to take “appropriate and targeted” measures. However, those might not come primarily in the form of interest rates cuts. The ECB policy rate is already at -0.5%, and although it might reduce that slightly further to -0.60%, the ECB could be more inclined to use its long-term loan programme for banks to help support the economy. These could be directed at small and medium sized businesses, which are likely to be those most impacted by the downturn.

Locally, the latest housing report will be released. The Real Estate Institute of New Zealand (REINZ) housing report for February is due near the end of the week, on either Thursday or Friday. If the economy slows in the manner share prices are currently suggesting, the housing market will not be immune. However, changes in housing market activity (or prices) tend to lag what we see in more liquid markets (like equities and bonds), so we are unlikely to see any impact yet. The local market will also look towards the RBNZ’s release of details on its work on unconventional monetary policy on Tuesday afternoon. After rate cuts in Australia and the US last week, with the Fed’s move coming outside of the usual meeting schedule, markets have been speculating on what the Reserve Bank of New Zealand (RBNZ) might do and whether it will bring forward any action rather than wait for its March 25 meeting.