Market Update March 2020: Oil Crash Fuels Sell Off
While many of us spent the weekend dealing with shortages in everyday essentials in our supermarkets in the wake of COVID-19 fears, the financial community woke up this morning to another, different – albeit slightly more familiar type of fear; an oil price war.
In the wake of a global slowdown linked to measures to restrict the spread of the COVID-19 virus, Russia’s unwillingness to agree to a cut in oil production to support OPEC members prompted Saudi Arabia to announce an increase in production at deep discounts in order to attract new customers; the markets responded with an historic collapse, as US oil prices experienced their second highest single-day price fall in history.
Share prices in major oil companies such as BP and Shell are down substantially, adding weakness to a market that continues to be impacted by the ongoing spread of coronavirus. A flight to safety has seen many indices experience their worst single-day returns in a decade as government bond yields move to record low levels, with the UK 10 year Gilt now yielding 0.2%. It is widely expected that the Bank of England will follow the US lead by cutting interest rates shortly with the European Central Bank also likely to offer further monetary stimulus in due course.
As seems to be the case in modern times, the media have decided to concentrate on the negative headlines relegating encouraging Coronavirus data from China to a mere sideshow. Data recently released from Beijing shows that the infection rate within China is in steep decline as the preventative steps taken from the Chinese government appear to be bearing fruit. With infection rates on the decline, production within China (as shown by the highly correlated daily Coal consumption) appears to be picking back up; easing supply fears that had dogged the markets over the last couple of weeks.
Despite the positive news from the epicentre of the outbreak, concerns remain closer to home as Italy’s government begin locking down entire sections of the country’s North and restricting movement for a quarter of the population, a move that Italian prime minister Giuseppe Conte says “will sacrifice the Italian economy in the short term to save it from the ravages of the virus in the long term”.
In the UK, Boris Johnson has confirmed that the UK will remain in the “containment” stage following an emergency Cobra meeting. Despite the confirmed cases in the UK reaching 319, the Cobra committee decided against “social distancing” at this stage whilst acknowledging that the virus “is going to spread in a significant way”.
Although it is troubling to see share prices falling, it is important to remember that it is by no means unusual; setbacks in markets occur for a variety of reasons and are part and parcel of long-term investment cycles. Therefore, it is important to retain perspective and remember that it is more important to stay invested than to attempt to time exit and entry points to markets.
Historically, equity returns have consistently outpaced other assets in the long-run, and market events such as these often provide an opportunity for those who manage to stay calm and pragmatic in the face of volatility.
It is our belief that market volatility will remain high in the short term, however markets will likely move beyond the virus concerns, adjust to lower oil prices, and benefit from the global stimulus measures that are being lined up by the global central banks.
As always, we shall continue to manage our multi asset model portfolios diligently and shall keep you informed with our view as they develop. Should you have any concerns in the meantime, please don’t hesitate to contact us.
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The information contained in this article is intended solely for information purposes only and does not constitute advice. While every attempt has been made to ensure that the information contained on this article has been obtained from reliable sources, Vizion Wealth is not responsible for any errors or omissions. In no event will Vizion Wealth be liable to the reader or anyone else for any decision made or action taken in reliance on the information provided in this article.