February 2020 – Economic Snapshot
The first three weeks of February saw further good performance by global equity markets. The news from China about Covid-19 seemed to be getting better and the latest economic data was still quite positive. However, all this changed very quickly from 21 February when markets suddenly became alarmed by reports of the virus spreading to a number of countries around the world, including Italy, Iran, South Korea and the US.
These developments reignited fears of global recession seen last year, and equity markets fell sharply, as did the price of oil and the A$, which ended the month at US0.652. Bonds rallied as equities fell. The US 10 year government bond yield dropped to a new record low around 1.15%, and the Australian equivalent yield falling to 0.84%. Gold initially rallied, but then gave up all its gains at the very end of the month as traders took profits in order to pay margin calls on other assets.
The big question is where to from here with these developments? We are moving into a phase where we will get more information about both Covid-19 and its impact on the global economy. There is a risk that the news flow gets worse before it gets better, but it will get better, though no-one knows exactly when.
In the meantime, central banks are in wait and see mode. They do not want to take action with interest rates until they can see the scale of the problem. And, for now, the authorities in China are sticking with their policies of support rather than stimulus, for fear of reigniting the problems in their financial system they have been striving to fix.