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Market Review
Equity markets have continued to lose momentum in the past week. Most indices worldwide are trading in a slightly negative range on a weekly basis, in most cases in the range of -1% to -4%. Brazil stands out negatively with a weekly loss of more than -10%. There, the corona crisis has led to a sudden increase in deaths in recent days. While the stock markets provided little action, the music played elsewhere on the American oil market. The US futures May contract for US WTI crude oil expired last week, reaching prices of around -$40. The sellers had to pay the buyers. This is an indication that one should not trust the current recovery of the stock markets after the violent sell-off from February to March. In normal times, oil is not negative, not even for a future contract that is about to expire. Market Preview After the corona crash sent the stock markets from their all-time highs to an approximately 30% decline within about 26 days, setting a new record that even outpaced the 59 days of Wall Street panic in 1929, the current crisis has also set a new negative record for the oil price. There are still many negative records and black swans slumbering in this market, investors should continue to exercise great caution. The occurrence of such events is a typical crash pattern. After a first panic there is often a calming down. Then events occur that nobody expected and that lead to an acceleration of panic-like sales. In 2008, this event was the Lehman bankruptcy. The crash protection risk model supports this current risk assessment, as it continues to show the status red for all regions and also globally. A look at the risk world map looked much better two months ago, where countries in green status are rarely available today. But you shouldn't think that there is no risk of a crash in these countries. A look at history shows that in phases of a crash, all stock markets fall in sync. Diversification no longer works in these times.
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Market Review
In the past week, the stock markets lost a little of the positive momentum of the previous week, but ultimately managed to show a slight positive performance. After some countries such as Switzerland or Germany have announced a slow return from the lockdown, other countries are still stuck in the corona crisis. Some virologists question whether it really makes sense to reactivate parts of society and the economy after just a few weeks. Others believe that the damage caused by the lockdown is greater than the one by the virus. In the end, the question arises whether damage means the death of people or economic losses. In Germany, the Bundesliga plans to resume ghost games in May. Similar plans exist in Spain, where Barcelona's coach Setién has expressed harsh criticism of these plans. The soccer club Schalke 04 is already urgently dependent on the allocation of the television money on May 2 in order not to get into severe existential troubles. Adidas has already applied for billions in loans from the DAX companies because otherwise it could not survive the corona crisis. And this already after just a few weeks. Market Preview A resurgent panic-like sales wave is currently not in sight, but could occur at any time due to an overwhelming negative event such as an unexpected bankruptcy of a significant company or an unexpected rapid rise in the number of new infections. As I already mentioned in one of my posts in the past week, the economic pressure is so great that the political aim is to return from the lockdown as quickly as possible. This has made my fear of a second wave of infection more likely. It seems to me that the strategy of a controlled epidemic is being pursued in these countries, because otherwise a month-long lockdown would cause irreparable damage to the economy. And whether a vaccine will be available at the end of this time is not even guaranteed (article by Prof. Dr. med. Dr. h.c. Paul Robert Vogt). The famous hedge fund manager Ray Dalio even gave a gloomy economic outlook in an interview. He is not talking about an impending recession, but about a depression comparable to that of the 1930s. In addition, a long-term credit cycle would currently come to an end, which would result in a realignment of the global monetary system. The positive scenario would be that the gradual relaxation of the lockdown is successful and does not lead to a new (critical) wave of infections. The economic damage will then also remain limited and the markets may recover. The negative scenario would be that the gradual loosening of the lockdown leads to sharper waves of infection and maybe even to conditions such as those in Bergamo or New York. In addition to the need for a further, possibly even longer lockdown, social and political unrest cannot be ruled out. Such discussions are already taking place in a prominent position, as the article by Barcelona trainer Setién shows. Market Review
The past week has been the strongest so far since the outbreak of the corona crisis. Equity markets gained an average return of 10% on a weekly basis, and without major setbacks. This let to hope that the lows of the crisis have already been left behind. One should be careful with such conclusions, however, since the great crises in history are repeated from interim bear market rallies. For example, from 2000 to September 2001 the DAX fell from 8000 to below 4000, recovered by 40% to 5500 points within 6 months, but then fell again by more than 50% to its final low of around 2200 points by March 2003. Regionally, the United States was the most profitable last week, followed by Europe and Asia. Over a month, the US is even slightly positive, while Europe and Asia follow in places with slightly negative values. Market Preview The past week has brought little new knowledge about the weeks ahead. The growth rate of new infections is fortunately declining in most European countries. It appears that the curve is slowly leveling off, similar to that in South Korea or China before. The next days and weeks will bring clarity. A temporary equilibrium appears to be forming in the markets, with most stock indices having passed their preliminary lows and are on the way up. It remains to be seen whether this branch is strong enough to push the markets further up, whether it slowly gives way again or even breaks off. The possible triggers for the markets are the same, positive news such as a major advance in a vaccine or therapy can accelerate the markets upward, while deterioration in infection and deaths, or especially a surprising bankruptcy of a larger company, can accelerate the downturn. According to the article by Prof. Dr. med. Dr. h.c. Paul Robert Vogt it seems that there must be doubt about the development of a vaccine. So far, it has never been possible to develop a vaccine against a coronavirus. Market Review
The last week since the outbreak of the corona crisis has been the first relatively boring week at the markets after a long while. Most global equity markets have been only slightly negative in the low single-digit percentage range since last week. The extent of the corona crisis is now known to market participants, quantitative approaches have long since reduced their positions, economists are trying to predict the economic consequences of the lockdowns and decision-makers have to weigh the risk to public health against the risk of falling into a serious economic crisis like the Great Depression. Market Preview The coming weeks are likely to be characterized by a further decline in volatility, as the first shock has passed and there are no surprises in the short term. People around the world are spellbound to see the development of infection and deaths and hope to see a turnaround and a significant decline in growth rates. This calm could still be our undoing. As Bill Gates announced in the Washington Post on March 31, a premature withdrawal from the lockdown must be avoided. Otherwise there is a risk of a second, even worse wave of infections. According to Gates, the lockdown in the US must be maintained for at least ten weeks and apply nationwide without restrictions. The same should apply to all of Europe. Since this is not the case, I fear that some countries will loosen the lockdown measures too early because of their fear of a total economic collapse. It also seems to me that in the event of an emerging second wave, testing efficiency is not as good as that of China or South Korea. It therefore seems likely to me that there will be a second wave in Europe and probably also in the USA. However, this would be the case only after 1-3 months. Until then, I expect a less volatile but yet steady decline in most markets. However, a surprising discovery of a therapy, medication or vaccine would be the starting signal for a strong recovery in the stock markets. If, on the other hand, there are unexpected bankruptcies, especially of companies with which nobody would have expected, a further sharp sell-off could take place on the markets. |
AuthorBertan Gueler, CFA Archives
November 2022
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