Global share markets entered bear market territory this week, de- fined as a fall of 20% from a recent peak, as fears intensified about the growing coronavirus pandemic. Policy responses by the US and ECB were seen as inadequate, exacerbating the sell-off. As a sec- ondary impact from Covid-19 outbreak, oil prices collapsed as Rus- sia refused to co-operate with Saudi Arabia and cut production to keep oil prices high in the face of falling demand. Saudi Arabia re- sponded by upping production and cutting prices.
As of Thursday night, the FTSE100 was around 30% below its recent peak, with a similar story repeated in the US, Europe and Asia. The oil shock led to a slump in stock markets on Monday, with the FTSE100 falling by 7.7% and US indices falling by similar amounts. After a reprieve on Tuesday with a flat session in London and a 5% rebound in the US, Wednesday saw continued falls with the FTSE100 finishing down a relatively modest 1.4%, helped by a 0.5% rate cut by the Bank of England. But the US markets continued their steep slide. The Dow closed down by 5.9% and the S&P500 by 4.9%. On Thursday, panic selling led markets to their worst one-day falls since 1987. The FTSE100 fell by 10.87% after President Trump announced a 30-day travel ban for anybody from mainland Europe, and the ECB’s decision not to cut its interest rates disappointed in- vestors. Many European markets fell by over 12%, while US indices all fell by close to 10%. In early trade on Friday, UK shares were heading up.
Company Focus: Prudential
Insurance giant Prudential announced plans for a partial IPO of its US business as the company reported a 20% uplift in adjusted op- erating profit.
The FTSE 100 company said it planned to sell a minority stake in its US arm, the Jackson National Life Insurance Company. Prudential has come under pressure from an activist investment firm called Third Point, which wants to spin off the whole of the US business after Prudential spun off its UK division in 2019.
Mike Wells, Prudential’s chief executive, said: “In order to diversify at pace, Jackson will need access to additional investment, which we believe would best be provided by third parties. Today we are announcing that preparations have commenced for a minority IPO of Jackson … We will now commence detailed engagement with our key stakeholders.” Prudential shares rose 2.4% in early trading after the announcement. Adjusted operating profit for the year to Decem- ber rose to $5.3bn (£4.1bn) from $4.4bn, above estimates of $5.1bn. The increase was driven by a 14% rise in Asia adjusted operating profit to $2.99bn. Adjusted operating profit in the US rose 20% to $3.1bn. Prudential said the coronavirus had slowed sales in China and Hong Kong and it would impact new business profit
Central banks around the world have sprung into action with a plethora of policies and rate cuts intended to mitigate the economic impact of the coronavirus and keep investment markets functioning.
Stimulus measures overseas have included rate cuts in the US and Canada and direct cash payments to residents in Hong Kong and Australia, intended to boost demand and confidence.
This week saw the Bank of England and the European Central Bank (ECB) step up with their own measures to shore up the banking system and avoid a credit crunch.
In addition to its emergency 0.5% rate cut on Wednesday morning, the Bank of England is encouraging banks to increase lending by facilitating cheap loans from the Bank of England’s own reserves. In return for very favourable terms, lenders will be expected to pass on super-cheap loans to consumers and businesses. Banks have also been allowed to dip into their own emergency reserve funds to finance more cheap lending. In total, the two measures should free up £290bn of extra credit to help the businesses and consumers through the Covid-19 crisis.
The ECB announced similar measures for European banks on Thursday, but stopped short of cutting rates, which are already at minus 0.5%. But this disappointed markets, helping to exacerbate the sell-off in equities. Also, on Thursday, the US Federal Reserve said it would inject around $1.5 trillion of temporary liquidity into Wall Street to facilitate complex trades that help finance the purchase of US Treasuries. In turn, this helps keep prices stable for an estimated $50 trillion of dollar- denominated assets around the world. It is a problem not seen since the financial crisis in 2008. Back in the UK, Wednes- day’s UK Budget included £12bn for measures targeted directly at helping businesses and consumers affected by Covid- 19. For a full roundup of this week’s Budget, see HERE
Meanwhile, as more countries close schools and restrict travel, the short-term hit to the global economy appears to be increasing. This will add further downward pressure on the UK economy, which data this week showed was already suffer- ing. According to the Office for National Statistics (ONS), UK economic output flatlined in the three months to January, the same zero GDP growth as the last quarter of 2019. This appears to quash any hopes of the “Boris bounce” that was suggested by many business surveys at the beginning of the year. It also came before any impact from the coronavirus, suggesting worse is to come. Rob Kent-Smith, head of GDP at the ONS, said: “The economy continued to show no growth overall in the latest three months. Growth in construction, driven by housebuilding, offset yet another decline in manufac- turing, particularly the drinks, cars, and machinery industries. The dominant services sector also showed no growth in the latest three months with falls in retail and telecoms balanced by strength in rentals, employment and education.”
Retail sales also struggled in February, as the storms and flooding kept shoppers indoors. The latest BRC-KPMG Retail Sales Monitor showed sales increased by just 0.1% in February, compared to a 3.2% annualised jump in February 2019. Paul Martin, UK head of retail at KPMG, said: “The highest anticipated ‘Boris Bounce’ has clearly struggled to materialise, and looking ahead, Covid-19 isn’t likely to help matters.”