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March 9, 2020

What is up with financial markets?

We experienced a deep sell off in equities around the world during February 2020 resulting from risk off trading, as investors prefer to hold safe haven assets like US bonds. As a result, emerging market currencies, including the rand sold off sharply. The following table provides a snapshot of SA and World Market performance for February 2020:

The main reason for turbulence in financial markets is the uncertain and likely negative impact that COVID-19 will have on global growth during 2020. This turbulence has continued during March 2020, despite the following:

  • The Federal Reserve cut interest rates aggressively by 0.50% to provide additional liquidity and support to financial markets.
  • The G7 countries announced that they would do whatever it takes to stabilise the financial

Financial markets stabilised briefly, but concerns remain about the impact of the COVID-19 virus on  the  real economy. The US government bond yield  came  down  to  low levels never experienced before.

Global supply chains are currently frayed. With demand for oil already under pressure, Saudi Arabia announced a boost in its production, which has resulted in a collapse in the price of oil. This follows after Saudi Arabia failed to convince Russia to cooperate in coordinated cuts to oil production.

The falling oil price makes it difficult for some oil producers in the world to  service  debt  and  interest  repayments.  For example, the Sasol share price had fallen by around.

The oil price shock affects confidence and commodity prices have generally come  under  pressure.  Similarly,  the  prices of other commodity and energy shares came under severe pressure. This reflects in the overall market with the FTSE/JSE All share Index TR down more than 17% from January 2020.


Is This The End?

The most recent fall in share prices in March 2020 follows a falling oil price. Should the price of oil recover if Saudi Arabia and Russia find a solution that works for both parties, the price of oil may well recover, share prices should recover, commodity prices should stabilise and some recovery should flow through to financial markets.

Such recovery may take place as quickly as the collapse had taken place.

It is important to realise that events are driven by negotiations between Saudi Arabia and Russia against the backdrop of an economic slowdown because of the COVID-19 virus.

Any of these events can change instantly. Generally, financial markets overreact to surprises. Equity markets have dropped dramatically since the beginning of the year. Be sure before changing plans for long-term retirement savings.

This is not the end of the uncertainty, but it is not the end of the world, as we know it!