Global Weekly: Corona impact starting to trickle down

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The consequences of the outbreak of the coronavirus continued to dominate the headlines, also the financial ones. In Asia, the size of the damage is still unclear, although the Japanese Central Bank already mentioned that the possibility of a recession has risen significantly.

Chinese authorities announced temporary corporate tax reductions and liquidity injections in order to support investor sentiment. In Europe, the latest German ZEW survey indicated that sentiment has worsened. Headwinds were kept down by central bank policies and by corporate results. Although guidance was sometimes muted due to the short-term consequences of coronavirus, there is hope that a strong second half of the year will compensate for the setback.

Last week, doubts about global growth caused a pick-up in defensive sectors such as utilities and telecom. Real estate benefited from the lower interest rates. After a strong start of the year, IT stocks had some difficult days despite good results in the semiconductor industry. Apple came with a warning, merely three weeks after delivering strong results and an upbeat outlook. Apple warned for lower revenue growth in the current quarter due to the coronavirus. Most IT stocks recovered very quickly after this slight disappointment. On Wednesday, Adidas and Puma also warned that the coronavirus would severely impact their sales in China: Adidas’ sales in China were down 85%, because many stores are closed. Nevertheless, shares of both companies rose that day.

Bonds in wait and see mode

European bond markets had a quiet start to the week as the US markets were closed due to President’s Day. The recent profit warning from Apple as well as the German ZEW indicator clearly disappointed market expectations, and made the economic impact of the coronavirus visible.

Yields on 10-years US Treasuries declined towards the important mark of 1.5%, which was previously tested in January. Their European counterparts, the 10-year German Bunds, followed and saw their yields declining towards the resistance level of -46 basis points (bps). Before the yields can decline further, we think they will need more significant impulses such as a statement from the Federal Reserve about a further key rate cut.

The recent recovery in the market was initiated by the trade deal between the US and China, the low interest rate environment and the supportive monetary policy. Looking forward, we believe the recovery will persist, despite the impact of the coronavirus. We therefore remain confident regarding our overweight towards corporate bonds and emerging market sovereigns, while we see limited potential for spreads of securitized bonds and core sovereign bonds to tighten much further. Emerging markets continue to offer more attractive spread levels than their high yield peers, supporting our overweight towards emerging markets in the high return bucket.

Next week, several interesting events may give further hints of the direction of rates and spreads. Key for investors will be the impact of the spreading coronavirus on both the US consumer and the business sentiment in Germany, expressed by the upcoming release of the Ifo business index.