Financial Bulletin – March 2020


February was dominated by the Coronavirus and its spread around the world, as investors worried that it would significantly impact the world economy.

The extent of this impact seemed to be confirmed by the latest Chinese manufacturing numbers, which showed output falling at an even faster pace than during the financial crisis.

Most stock markets suffered significant losses with the US Dow Jones experiencing the biggest single-day fall since the financial crisis.

The US seemed to be heading for a significant reduction in economic activity.

In Europe the news was slightly better as both the UK and Eurozone manufacturing sectors actually accelerated. 

In the face of the large stock market falls and potential shock to the global economy, some Central Bank heads began to talk of new stimulus measures.

Such was the rally in the US stock market at the end of last year that even after a substantial sell off it has still made a positive return over 6 months. Several other indices have made losses, however.

Over the last 6 months the FTSE 100 lost around -9.63%, whilst the Euro Stoxx 50 lost around -3%. The US S&P 500 gained around 0.95% (all in price terms). 

The broad Emerging Markets index gained approximately 2.21% (in US$ price terms).

The Japanese Nikkei 225 gained approximately 2.5% (in price terms).

The major government bond markets rallied strongly as investors began to anticipate interest rate cuts. The US 10 year government bond yield fell to an all time low.

US Economic News

During January the US economy appeared to be building a head of steam, but the outbreak of Coronavirus appears to have halted this momentum for now.

The manufacturing sector still posted an increase in output during February, but it was the weakest for some time as companies complained of supply chain disruption.

The effect on the services sector is likely to be even worse, as forward looking surveys predict the sector will have actually contracted during February, the first time since 2013.

Moreover, the spread of Coronavirus did not begin to really gather speed until the final days of the month, suggesting that the economic impact is likely to get worse before getting better.  

Despite the weakness in the manufacturing and services sectors, however, business optimism about the year ahead actually rose. This seems to

suggest that many businesses view the slowdown as temporary.

In response to the slowdown, the Federal Reserve Chairman indicated that the Central Bank would “act as appropriate” – the market now believes an interest rate cut is inevitable.

UK Economic News

The UK economy was one of the few regions of the world to improve during February, as firms continued to boost economic activity on the back of a decisive General Election result.

This seems to have outweighed the effect of the Coronavirus outbreak – for now.

Manufacturing output rose at the strongest rate for 10 months on the back of robust domestic demand, and optimism rose further.

The improvement in the construction sector was even more eye-catching, as it witnessed the largest rise in new orders since 2015.

However, businesses noted that the Coronavirus was beginning to affect demand, as well as supply chains, particularly in the manufacturing sector.

Therefore, despite the encouraging performance of the economy during February, many economists expect the Coronavirus outbreak to be a significant drag on the economy going forward.

The outgoing Governor of the Bank of England, Mark Carney, predicted that UK economic growth forecasts would be downgraded over the coming months.

As in the US, expectations of an interest rate cut grew.

Whilst most of investors’ attention was on the Coronavirus, there were also important developments in the upcoming UK-EU trade negotiations.

With both sides seemingly becoming more belligerent, the Prime Minister stated that unless there was satisfactory progress by June the UK would simply stop negotiating and trade on World Trade Organisation terms.  

Eurozone Economic News

Whilst the Eurozone manufacturing sector contracted at the slowest rate for a year, it still nonetheless contracted, and supply chains were disrupted by the Coronavirus.

Business confidence, which had risen during January, fell back due to Coronavirus uncertainty, and job numbers in the manufacturing sector were cut. 

Inflation across the region fell to just 1.2% as demand remained fairly anaemic.

With the economy expanding by just 0.1% in the final quarter of last year, there is a possibility that the region could contract in the first quarter of this year if the Coronavirus continues to disrupt economic activity.

Christine Lagarde, the President of the European Central Bank, joined other Central Bank heads in pledging to take action to support economies in the wake of the outbreak.

Wider Economic News

China has so far been the country worst hit by the effects of Coronavirus, and in order to contain the virus has essentially shut down several towns and cities.

The result of these measures is that the Chinese manufacturing sector contracted at the fastest rate on record; even faster than during the financial crisis.

However, as the number of new cases began to tail off and the government offered targeted support, business optimism about the future actually rose to a 5 year high.

If the virus can be contained, therefore, we could see a swift recovery in output.

Owing to the proximity to China, the Japanese economy was also badly hit during February as the manufacturing sector deteriorated at the strongest rate since 2016.

The Japanese Central Bank pledged “ample liquidity” for the economy.

Financial Markets and Corporate News

Many stock markets suffered significant losses during the final week of February, although some have still made gains over a 6 month period.

Over 6 months the FTSE 100 lost -9.63%, the Euro Stoxx 50 lost -3%, whilst the S&P 500 gained 0.95% (all in price terms).  

Japan’s Nikkei 225 returned approximately 2.5% (in price terms).

The broad Emerging Markets index returned approximately 2.2% (in US$ price terms).

Many highly-rated government bonds rallied in the final week of February as investors turned away from risky assets.

In the process the US 10 year government bond yield fell to an all time low.

The Investment Association (IA) UK Gilts sector returned 0.70%, the IA Corporate Bond sector returned 1.91%, whilst the Sterling High Yield sector returned 1.26%.

Summary of Key News:

  • A new virus emanating from China threatened to severely disrupt the world economy.
  • The US economy weakened markedly.
  • The UK economy held up well as business confidence is high following the General Election.
  • The Eurozone manufacturing sector contracted at a slower rate and business confidence fell.
  • The Chinese manufacturing sector contracted at the sharpest rate on record.
  • Most major Central Banks pledged support if economic conditions continue to worsen.  

Financial Markets:

  • Over 6 months the FTSE 100 lost -9.63%, whilst the Euro Stoxx 50 lost  -3% and the S&P 500 gained 0.95% (all in price terms).
  • The Japanese Nikkei 225 returned approximately 2.5% (in price terms).
  • The broad emerging markets index returned approximately 2.2% (in US$ terms).
  • The (IA) UK Gilts sector returned 0.7%, the IA Corporate Bond sector returned 1.91%, whilst the Sterling High Yield sector returned 1.26%.

Source: FE Analytics


Clearly the question on many investors’ minds will be whether the Coronavirus outbreak can be effectively contained, and the economic cost of doing so.

Encouragingly, the number of new daily cases in China has begun to tail off significantly.

If the outbreak in other countries peaks after only a month or so, then the disruption is likely to prove temporary, and economies should recover fairly swiftly.

However, financial markets seem to have factored in the worst case scenario when selling equities so sharply.

The speed of the ‘correction’ was likely also due to the fact that global equities had rallied strongly and were looking expensive on some measures.

One positive aspect of the sell-off is that, if you believe company earnings will not be permanently affected by the outbreak, most stock markets are now much cheaper than they were a month ago.

The direction of economies and financial markets is therefore heavily reliant on how the Coronavirus outbreak evolves. 

Excepting the disruption resulting from the Coronavirus outbreak, the fundamentals of the world economy remain fundamentally favourable. 

Unemployment is generally low, inflation mostly contained, and Central Banks continue to offer accommodative policy.