Is there cause for optimism despite the coronavirus?
March 2020 will be remembered as a trying month for traders. It was at this time that we realized COVID-19 was not a passing epidemic but a serious global pandemic — one that would soon pose the biggest health challenge of recent memory. Through a combination of emergency lockdown measures, record low interest rates and uncertainty over the virus, global markets were being brought to their knees.
In the U.K., the FTSE 100 plummeted to its lowest level since 2011 — resulting in the March 9 being dubbed “Black Monday.” Similar trends were noted in the U.S. The Dow Jones Industrial Average suffered its largest point plunge in history, with investors fearful of a looming recession and plunging crude oil prices. For a quarter that began full of optimism and confidence, few could have anticipated that come the end of Q1 2020 we would seriously be considering the beginning of a global recession.
Are we over the worst of it?
So how did things fare? Are we any closer to an economic downturn as a consequence of COVID-19? The short answer is 'no.' Dare I say it, we might actually be witnessing the beginnings of a market recovery. Let’s look to some examples to demonstrate what I mean.
On Wednesday, April 29, the FTSE 100 surged past 6,000 points for the first-time since Black Monday. Given this marked a 20% recovery, the FTSE 100 officially become a bull market — a significant turning point for a stock market many considered to be in turmoil. While there is nothing to suggest that the FTSE 100 will begin a long-term recovery, this nonetheless demonstrates that investor confidence does still exist in this current COVID-19 climate. Once businesses are able to return to some degree of normality and social distancing measures are lifted, we could see further gains being made.
Even the price of oil is making gains at a rate that would not have seemed realistic just a few weeks ago.
In the middle of April, oil prices crashed as a result of three factors — falling demand as a result of COVID-19, storage facilities being full, and rising supply due to Saudi Arabia and Russia falling out at the recent OPEC meeting. At that point, it was estimated that supply was likely to remain elevated and oil prices would remain low. There was even talk of this symbolizing the beginning of the end for fossil fuels as the global economy shifts to greener alternatives.
A few weeks later, oil prices surged as a result of storage demand for the commodity rising slower than anticipated. On April 30, West Texas Intermediate crude experienced a 20% rise in value — eventually reaching $18 a barrel. Internationally, the price of Brent crude also increased by 14%. With talk of social distancing measures being lifted, will investors be once again looking to this commodity? It is too early to tell. Price shifts are closely linked to the impact COVID-19 is having on wider society. A spike in cases or a second outbreak could quickly wipe out this steady price recovery.
COVID-19 has allowed us to understand how our modern and integrated markets react when faced with a global pandemic. Some assets have performed as expected, others have not. A decade from now, I have no doubt that investors will cast their eyes back to 2020 to understand just how the markets fair when facing profound political, economic and social events. And let’s not forget we still have big events on the cards on both sides of the Atlantic — namely, the U.S. presidential election and the U.K.’s impending departure from the European Union. It all makes for an eventful few months ahead of us.
Giles Coghlan is Chief Currency Analyst at HYCM – an online provider of forex and Contracts for Difference (CFDs) trading services for both retail and institutional traders. HYCM is regulated by the internationally recognized financial regulator FCA.