Knowledge. Shared Blog

March 2020

From Complacency to Panic: Coronavirus and Oil

Paul O’Connor, Head of the UK-based Multi-Asset Team, discusses the recent market shocks as oil prices tumble and the coronavirus continues to impact countries globally.

Key Takeaways

  • The oil shock has jolted the previously resilient markets for high-yield debt and emerging market bonds and credit markets have gone from being overbought to oversold, overnight.
  • In the absence of mood-altering policy interventions, markets will remain highly sensitive to the evolving progress of the coronavirus.
  • While it would be foolish to try to call the bottom in the markets, we believe this environment presents opportunities to buy and to gradually rebuild risk exposures into market weakness.

The violence of the oil shock has added a new urgency to the broad-based de-risking that is sweeping across global markets. In just over two weeks, investor sentiment has swung from complacency to panic. What started as a virus-driven de-risking has now mutated into a broad-based, multi-asset capitulation.

Whereas last week investors were largely focused on trying to evaluate the potential impact of the COVID-19 coronavirus on global growth, they are now worried about scenarios involving self-reinforcing adverse market dynamics. The oil shock has jolted the previously resilient markets for high-yield debt and emerging market bonds. The risk now is that investor redemptions will accelerate at a time when market liquidity is already under pressure. Still, the scale of the repricing has been so rapid that value is already beginning to emerge. Credit markets have gone from being overbought to oversold, overnight.

The ferocity of the sell-off in risk assets reflects a massive rethink on global growth. In just over two weeks, investor expectations have shifted from broad-based complacency to pricing in a high probability of recession.

It is far from obvious what will stabilize market sentiment. Whereas central bank actions have been effective circuit breakers in many past market sell-offs, we see limited scope for game-changing monetary policy interventions today. We expect central banks’ actions to focus on liquidity provision and keeping credit flowing through the financial system rather than trying to deliver big rate cuts or new quantitative easing programs. Fiscal policy is clearly the right solution for the world economy’s current ails, but progress here so far has been piecemeal.

In the absence of mood-altering policy interventions, markets will remain highly sensitive to the evolving progress of the coronavirus. Concern has now shifted to the U.S., where the number of confirmed cases looks likely to surge in the weeks ahead. Against that backdrop, investors seem unwilling to recognize that trends are now looking more favorable in China and even the South Korean outbreak seems to be coming under control.

The coronavirus presents investors with an unprecedented global problem. Investors are uncertain about the nature of the virus, its potential economic impact and the policy response. The oil shock has only added to this confusion and uncertainty.

One thing we do know, however, is that markets are now in panic mode. While it would be foolish to try to call the bottom in the markets, we believe this environment presents opportunities to buy and to gradually rebuild risk exposures into market weakness.

Abandon Your Doubts,

Not Your Goals

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