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Weekly comment: Whatever it takes

As governments and central banks continue to try to support markets, what are investors expecting in terms of economic data? And will oil companies cut their dividends in response to the oil price crash?

Global markets continue to be under pressure as Covid-19, as the coronavirus is described, spreads outside of China. There are three factors at play here, which are interacting to create great uncertainty. First, the global health crisis; although new cases in China are now only linked to people travelling into the country, the epicentre has moved to Europe and in particular Italy. The response by countries has been varied but most are moving to a partial or total lockdown in an attempt to restrict the spread of the disease.

The consequence of this leads to the second factor, which is economic disruption. With whole countries now restricting the movement of their populations, shops and businesses are closing with an immediate impact on jobs and general activity. Governments are now announcing unprecedented amounts of assistance to help alleviate this. Meanwhile, central banks are pumping massive amounts of liquidity into the financial system to ensure that markets continue to operate and the banking system continues to function as close to normal as possible.

The third interacting factor is less directly related and that is the sharp fall in the oil price. This is the result of a completely unexpected u-turn by Russia to withdraw support for OPEC’s proposed cuts in oil production. Saudi Arabia’s response was to step up production as a retaliatory measure. Although a lower oil price is ultimately positive for consumers, the first impact is a negative one for oil producers.

The obvious question is when will markets stabilise?  The best answer is that it may happen when there is evidence of a peak in new coronavirus cases. The experience of China and South Korea, who are effectively seeing few if any new cases, gives some hope that this could be seen in a few months. In the meantime, volatility looks set to remain a feature for markets.

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