Market overview: coronavirus plunges the markets into turmoil

Although the financial markets paid little attention to the coronavirus outbreak for some time, there has been a huge change recently. Volatility has increased sharply. Equity prices have suffered historic slumps and US bond yields have hit new lows. However, demand for secure currencies such as the Swiss franc and Japanese yen remains strong.

  • Yields to maturity on government bonds have plunged to new lows owing to far higher uncertainty. Investors have also begun to avoid bonds of debtors with a poor credit rating, leading to a perceptible widening in corporate bond spreads.

    Indexed performance of government bonds in Swiss francs

    100 = 01.01.2020

    This graphic shows the performance of government bonds from Switzerland, the USA and Germany in Swiss francs. The value of government bonds has risen considerably since the start of the year due to growing uncertainty and a fall in interest rates. Gains stood at around 5 percent in Switzerland and Germany, climbing as high as 7.5 percent in the USA.
    Source: Refinitiv

    Despite low and even negative yields in some cases, secure, long-term government bonds have risen sharply in value over recent weeks. Prices have climbed more significantly in the English-speaking countries than in continental Europe. In the USA and UK, central banks are still able to make major interest rate cuts given their higher interest rates. They have not disappointed in this respect over recent weeks, whereas their European counterparts have not cut rates – which has had an impact on their respective price trends.

    Trend in 10-year yields to maturity

    In percent

    The graphic shows the performance of yields on 10-year government bonds in Switzerland, the USA and Germany. 10-year yields to maturity are an important benchmark for interest rate developments. They have continued their long-term downward trend since the start of the year.  The decline has been sharpest in the USA.
    Source: Refinitiv

    Interest rates reached a new all-time low in various countries in recent days. The dramatic drop in yields in the USA indicated that the market participants already anticipated further interest rate cuts by the Federal Reserve. In Switzerland, interest rates still stand at just above the lows of last summer. Market participants clearly do not anticipate that the Swiss National Bank (SNB) has much more leeway to cut rates. As a result, the interest differential compared to countries abroad has narrowed sharply.

    Credit spreads on corporate bonds

    In percentage points

    This graphic shows the difference between the yields to maturity on government and corporate bonds in US dollars, euros and Swiss francs. These credit spreads rose sharply, particularly in the USA, but also in the eurozone, to a lesser extent, last month. This means that riskier debtors have to pay higher interest than secure government issuers when borrowing.
    Source: Bloomberg, Refinitiv

    At the beginning of the year, credit spreads on high-risk corporate bonds reached lows similar to those seen to before the start of the last financial crisis. Turbulent conditions in recent weeks have led to investors differentiating more sharply between debtors of good and poor credit standing, which has caused a sharp widening in spreads. In these more difficult financing conditions, the transport, tourism, entertainment and oil and gas sectors are currently struggling as their earning power has been most severely hit by the coronavirus crisis.

  • Equity markets have seen the greatest price falls since the 2008 financial crisis in recent weeks. The VIX index, which measures volatility on the US equity market and hence is a good indicator of anxiety, climbed to a value of 75, approaching the previous high of 89 in October 2008.

    Indexed stock market performance in Swiss francs

    100 = 01.01.2020

    This graphic shows the performance of the equity markets in Switzerland, worldwide and in emerging markets in Swiss francs over the past 12 months. Equity prices in the emerging markets fell at the start of the year, whereas prices in developed economies soared to new record highs in February. There has since been a sharp downward trend on all equity markets.
    Source: Refinitiv

    For as long as coronavirus primarily affected only China, the global financial markets ignored the risk it posed. Benchmark indices in Western countries soared to new record levels in mid-February. Once it became clear that the virus was a global issue, the markets reacted quickly. Since then, Switzerland’s benchmark index, the SMI, has lost around 25 percent of its value at times within a month. The slump on the global equity markets actually totalled more than 30 percent in Swiss franc terms. Thursday, 12 March 2020, will go down in history as the day we saw the biggest price falls for over 30 years. However, there were significant recoveries on certain days too.

    Momentum of individual markets

    In percent

    The graphic shows the momentum of 12 key equity markets worldwide. The momentum compares the current 10-day average with the average of the past 240 days.  Momentum has moved well into negative territory since last month. Momentum is still least negative in the markets of East Asia and in Switzerland.
    Source: Refinitiv

    Whereas all markets posted positive momentum last month, there has been a complete turnaround since then. Momentum is currently still least negative in the nations of East Asia. In these countries, coronavirus infections have been kept within tight limits to date (Taiwan, Japan), or the number of new infections is declining (China, South Korea). In China, the government lent support by intervening in the equity market. Switzerland, in turn, is benefiting from the relatively defensive positioning of its indices.

    Price/earnings ratio

    The graphic shows the price/earnings ratio (P/E ratio) for the stock markets in Switzerland, worldwide and in emerging markets since 2000. The P/E ratio fell sharply in all three equity markets after the latest market correction and is now close to the long-term average again.
    Source: Refinitiv

    Before the current correction, stock market valuations, as measured by the price/earnings ratio (P/E ratio), were high. Valuations were only partly justified by fundamental data as the earnings growth of companies slowed down or even stagnated. The high valuations are one reason why the market correction in recent days has been so huge. Equity markets have not just responded to the worsening economic outlook, but also corrected overvaluations of previous months.

  • Swiss real estate investments were also impacted by the downturn on the financial markets. After record highs in February, they have now returned to the levels seen at the end of last year.

    Indexed performance of Swiss real estate funds

    100 = 01.01.2020

    The graphic shows the indexed average performance of listed Swiss real estate funds over the past 12 months. The long-term upward trend came to an abrupt end. Swiss real estate fund valuations have now slipped back to those seen at the end of 2019.
    Source: Refinitiv

    Swiss real estate investments were also impacted by the substantially higher risks of recession and the gloomy sentiment on the financial markets worldwide. After reaching record levels in February, they fell sharply recently. This means their prices are now once again below the level at the start of the year. Prices of international real estate investments also plummeted recently.

    Premium on Swiss real estate funds and 10-year yields to maturity

    In percent

    This graphic shows the yield to maturity of 10-year Swiss government bonds and the premium on real estate properties contained in Swiss real estate funds since 2000. This premium skyrocketed last year and reached new all-time highs in February of this year, before tumbling in March. This trend shows an inverse correlation with 10-year yields. However, we currently believe the high level of premiums is generally justified in view of the low yields to maturity of bonds.
    Source: Bloomberg, Refinitiv

    Even though the prices of real estate investments have fallen sharply recently, valuations remain high. The considerable increase seen last year is continuing to have an effect. Premiums – in other words, the difference between the intrinsic value of real estate and their actual market value – have fallen from highs of close to 35 to below the 30 mark. As interest has also fallen, the valuation has returned to a level that can be described as fair.

    Vacancy rate and real estate prices

    This graphic shows the vacancy rate of Swiss residential property and the price trend for single-family homes, rental properties and apartments. While rental prices and the real estate prices of apartments and rental properties have been on a downward trend over the past five years, the vacancy rates are continually rising. There has been no fall in the price of single-family homes to date.
    Source: Refinitiv

    Apartment prices have risen slightly recently. In contrast, rental prices are likely to continue to fall over the coming months. At the beginning of March, the Federal Office for Housing decided to reduce the reference interest rate from 1.50 percent to 1.25 percent. This was the first adjustment to the reference interest rate since 2017. People in existing tenancies are now entitled to have their rent reduced accordingly.

  • Currencies

    Anxiety over the coronavirus outbreak is also unsettling the currency markets. There is strong demand for secure currencies. This is affecting the Swiss franc in particular.

    USD/JPY

    Currency pair Price PPP Neutral range Valuation
    Currency pair
    EUR/CHF
    Price
    1.06
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    1.17
    Neutral range Range of historically normal fluctuations.
    1.09 – 1.26
    Valuation
    Euro undervalued
    Currency pair
    USD/CHF
    Price
    0.95
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    0.93
    Neutral range Range of historically normal fluctuations.
    0.81 – 1.04
    Valuation
    USD neutral
    Currency pair
    GBP/CHF
    Price
    1.19
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    1.45
    Neutral range Range of historically normal fluctuations.
    1.25 – 1.65
    Valuation
    Pound sterling undervalued
    Currency pair
    JPY/CHF
    Price
    0.90
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    1.06
    Neutral range Range of historically normal fluctuations.
    0.91 – 1.25
    Valuation
    Yen undervalued
    Currency pair
    SEK/CHF
    Price
    9.70
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    12.08
    Neutral range Range of historically normal fluctuations.
    10.92 – 13.23
    Valuation
    Krona undervalued
    Currency pair
    NOK/CHF
    Price
    9.29
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    12.86
    Neutral range Range of historically normal fluctuations.
    11.56 – 14.16
    Valuation
    Krone undervalued
    Currency pair
    EUR/USD
    Price
    1.12
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    1.27
    Neutral range Range of historically normal fluctuations.
    1.10 – 1.43
    Valuation
    Euro neutral
    Currency pair
    USD/JPY
    Price
    104.81
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    87.90
    Neutral range Range of historically normal fluctuations.
    72.32 – 103.47
    Valuation
    Yen undervalued
    Currency pair
    USD/CNY
    Price
    7.03
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    6.34
    Neutral range Range of historically normal fluctuations.
    6.09 – 6.59
    Valuation
    Renminbi undervalued

    Source: Bloomberg, Refinitiv

    The turbulent conditions have also caused great volatility on the currency markets. While the currencies of some countries rich in raw materials plummeted, demand for secure currencies rose. This applies to the Swiss franc in particular, which continued to appreciate despite interventions from the Swiss National Bank (SNB). The US dollar fell in value recently after the decisions taken by the Federal Reserve, the US central bank.

    Gold

    Against a backdrop of greater uncertainty on the market, the price of gold increased by 10 percent since the start of the year for a time. The value of gold has now fallen sharply again.

    Indexed performance of gold in Swiss francs

    100 = 01.01.2020

    This graphic shows the indexed performance of gold in Swiss francs over the year. Against a backdrop of greater uncertainty on the market, the price of gold increased by 10 percent since the start of the year for a time. The value of gold has now fallen sharply again.
    Source: Refinitiv

    The gold price has fluctuated considerably recently. Gold did benefit from the demand for secure assets on some days. However, it also declined on days when stock markets slumped, which means its value is currently only slightly higher than at the start of the year. One possible explanation for why the gold price has not benefited from the uncertainty to a greater extent up to now is that market participants required liquidity and therefore disposed of some of their gold holdings. From a Swiss perspective, the fact that the value of the US dollar – the currency for trading gold – fell against the Swiss franc also had an adverse impact on the gold price.

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