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Global Market Dynamics Sometimes the universe has an almost perverse way markets struggled to deal with the uncertainties created
of aligning events, such that it seems as if they were
by the pandemic, central bank intervention combined
choreographed in some sort of predetermined manner. with government action to support economies became
At 11pm on 31 January 2020, the United Kingdom almost inevitable.
formally withdrew from the European Union, thereby
defining a new direction of travel for the country. At that The US Federal Reserve (Fed) moved first amongst the
moment, the way ahead seemed clear, although earlier central bank community, by announcing it was cutting
that same day the UK reported its first two confirmed interest rates by 0.5% on 3 March. The UK quickly
cases of Coronavirus. Whilst it was not appreciated at followed suit on 11 March, when the Bank of England
that time, it was the second of these two events that announced an emergency 0.5% base rate cut from 0.75
would go on to define not only 2020, but potentially to 0.25%. These emergency measures however didn’t
how we live our lives for a generation, further pushing stabilise stock markets, with government bond yields
out to the margins what has been the most divisive hitting new all-time lows and major equity indices falling
political issue for decades. into bear market territory (20% falls from 2020 peaks).

What was to unfold over the coming weeks touched In mid-March, the Fed acted again, this time reducing
almost every single person on the planet, and drew in rates still further and announcing a $700 billion asset
all facets of our societies; we grappled with a global purchase programme covering US Treasuries and
health emergency, the scale of which had not been seen mortgage-backed securities. Similar asset purchase
in living memory. Financial services, although not at the programmes were also seen from the Bank of Japan, the
centre of this crisis, was not immune from feeling the European Central Bank, and the Bank of England (BoE).
full impacts of COVID-19, as markets reacted violently These specific short-term interventions provided much
to the uncertainties they were facing. needed liquidity to allow markets to continue operating
within normal, albeit extreme parameters.
As the health crisis quickly developed into an economic
crisis, we saw periods of unprecedented market volatility Reports since have suggested that the £200 billion
that led directly to significant intervention from central asset purchase scheme from the Bank of England, has
banks and governments globally. On 16 March, the VIX, resulted in it becoming the single largest holder of UK
the globally recognized index of the markets expectation government debt. What we have seen here is in effect a
of future volatility, peeked at 85. To put this sentiment new type of intervention; instead of acting as the lender
into context and at the time of writing, the VIX is circa of last resort and supporting specific institutions, central
25 to 30, and typically traded in the range of between banks playing the role of market maker of last resort and
15 and 20 during 2019. Set against this backdrop, we pumping liquidity into the system.
saw equity markets fall by some 12% in a single day,
followed by eight consecutive days when equity markets Although the various monetary policy interventions
moved by more than 5%. were able to maintain liquidity within financial markets,
it became clear that monetary policy alone was having
Managing expected volatility has been one of the no significant impact on financial markets themselves.
defining factors of this particular crisis. Money market Governments realised that more fiscal policy was
funds lost up to 10% of their assets, as investors sought necessary. This led to a range of fiscal stimulus measures
the refuge of cash and looked to potentially generate from governments globally, with most notably the
liquidity to cover increased levels of margin calls, stimulus package from the UK government commanding
particularly in respect of derivatives transactions. As headlines globally due to its scope and scale.

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