GLOBAL ECONOMIC UPDATE

After a week of heightened volatility, will the markets return to stability soon?

Last week financial markets witnessed chaos, illiquidity, despair and euphoria. The Volatility Index rose from about 42% to peak at around 75% before tumbling to close the week at 57%. At the start of the week, Saudi Arabia and Russia tussled in a price war in the oil market, leading to a collapse of global oil prices — a drop of roughly 30% in one day. Meanwhile, the SET index started off the week at around 1,300 and subsequently tumbled to 975, before staging a furious rally to close the week at 1,115.

Extreme volatility was prevalent across global stock markets. The speed of the fall and rise of the S&P 500 has been almost unprecedented, rivalling the 1987 financial panic. Assets showed a high degree of correlations. US treasuries, generally considered a safe haven, sold off along with other risk assets, with 10-year yield rising from 0.42% to 0.98% during the week. In addition, gold was down 3.8% for the week. Usual safe havens did not offer protection when push came to shove.

Apart from heightened volatility, there was a sign of illiquidity as stresses in the short-term funding and US treasury markets mounted. The Federal Reserve said it would pump in trillions of dollars into the financial markets as it seeks to address the highly unusual disruptions in the treasury financing markets. Trading conditions in US treasuries, the most liquid debt market, have worsened significantly, which added considerable pressure on the global capital markets — contributing to extreme movements in the financial markets. The Fed acted as a market maker throughout the week, as liquidity dried up.

There is a sense in the markets that policy responses have been inadequate in shoring up confidence and supporting the economy. Monetary policies have seen emergency easing in several countries, with many more undoubtedly to come. But aggressive rate cuts will not ease the fear of the public, nor contain the coronavirus spread. More heavy lifting will need to come from fiscal support, by ensuring that people and businesses will survive the outbreak. Financial markets will always be fickle, but the real world is facing a very real crisis.

By attempting to contain the outbreak, many countries closed schools and borders and banned large gatherings, including concerts, seminars, sporting events. Following China’s example, Italy and Denmark implemented a nationwide lockdown. There will be many more to follow. We are clearly in uncharted territory. No one quite knows when exactly this will end. But it is very easy to get tangled up in doom and gloom as we are bombarded with sensational journalism non-stop in the age of social media. Remember: good news does not catch attention as well as bad news. We are wired to avoid clear and present danger in order to survive.

This is a shock, decidedly a very large shock, to the global economy, which will put many countries into recessions. There is a high probability that we could face a global recession if the outbreak is not contained soon. In my opinion, despite being a severe hit to the global economy, this will only be temporary. In the meantime, we can only pray that governments take unprecedented steps to support ordinary people and small businesses, so they do not become unemployed or bankrupt while we wait the crisis out.

When we first wrote an article about the coronavirus in early February, Thailand was the second largest country in terms of the number of infections. Since then, countries like Italy, Iran and several European countries, have seen a dramatic rise in the number of confirmed cases of Covid-19. While Thailand has not banned any tourists at all, the rise in the number of infections in the country has so far been relatively modest.

One factor that may explain the disparity is weather. In Thailand, our temperature in Bangkok roughly ranges between a high of 34C and a low of 24C. Reports indicate that the temperature most conducive for coronavirus spread is in the 5-11C range. The countries affected most by the outbreak are located around latitude 40 (see map). Another piece of good news is that we see improvements in China and South Korea as the draconian responses have proved able to mitigate and contain the outbreak.

Therefore, we conjecture that once temperature rises in the spring and summer in the aforementioned countries, we are likely to see containment in the next few months. In the meantime, brace for more volatility in the next few months, but keep an eye out for many opportunities. Cool heads always prevail at times like this.