It seems an eternity ago but equity markets around the world reached record levels in mid-February, only to fall dramatically as a consequence of the global spread of COVID-19, better known as the coronavirus. This is classic “Black Swan” event, meaning it was impossible to predict and took markets completely by surprise. Hopes of geographically containing the spread of the virus have been dashed with the WHO now declaring the virus a global pandemic, as there are now very few corners of the globe not affected. Attempts to quarantine affected areas have been met with only limited success in slowing the spread of the virus. Global manufacturing supply lines have been severely disrupted and a growing sense of panic is severely impacting consumption activity.
The market reaction to this event has sparked volatility not seen since the onset of the GFC in 2008, with equity markets falling close to 20% from their February highs and a flight to security pushing government bond yields to all-time lows. Credit spreads have widened as a consequence of tightening corporate liquidity, especially in the energy sector. The reality is that it is impossible to forecast with any degree of certainty how the market will react in the short term as fear and panic is dominating market behaviour.