Global Weekly: On a roller coaster

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After the severe market drop last week, due to the coronavirus, the US Federal Reserve has taken several actions in an effort to support the economy. At the same time, the US primary elections had their Super Tuesday, with Biden as a surprising winner.

The US Federal Reserve tried to stem the market bleeding with a pep talk, however, to no avail. Consequently, in an emergency move, the central bank proceeded by cutting the benchmark rate by 50 basis points. The rate cut itself did not come as a surprise, but most observers did not expect the announcement before the regular Fed meeting on 18 March.

Global action is likely to follow, as the rate cut decision was preceded by a teleconference with central bankers and finance ministers from other G7 countries. ECB vice-president Luis de Guindos confirmed that the ECB rate committee is also ready to act. Measures to improve access to loans for SMEs (small and medium-sized enterprises) are also on the table. Both in Europe and the US, financial stocks dropped more than the market average after central bank interventions, due to the prospects of lower interest rates for a longer period of time.

While the number of new corona infections in China is decreasing, the impact on the economy is reflected in several economic indicators. Chinese producer confidence in February dropped to the lowest level ever (35.7), even below the bottom of the 2008 financial crisis. Caixin Services PMI also dropped to a new historical low.

On Super Tuesday, fourteen US states held primary elections and/or caucuses for the Democratic Party. The results were welcomed by the American stock market, as Joe Biden emerged as the main contender to Bernie Sanders for the Democratic party nomination. Health care stocks, especially health insurance companies, benefited the most from the rise of Joe Biden. Biden does not support the contentious health care reforms of Bernie Sanders.

Bernie Sanders is a strong advocate of Medicare-for-all, which would nationalise a part of the health care business and would wipe out 5% to 30% of the health care insurance business (depending on the company). The odds for Medicare-for-All, however, are very small. Not only does Sanders need to win the nomination over Biden, but then he also needs to beat Trump. Moreover, the Democrats would likely need to get a majority in the Senate, which is now dominated by the Republicans, for the bill to be passed. But the biggest barrier for Sanders would be the Democratic party itself, as many strongly oppose Sanders’ plan --- the American belief in free markets is very high.

Bonds: Big market moves

Since the beginning of 2020, the 10-year US Treasury moved from 1.917% to a low of 0.90% on Monday, 2 March. On Tuesday, after a conference call between a group of global leading finance ministers and central bankers, the US Federal Reserve delivered a 50 basis-point rate cut, just after US markets opened. That pre-emptive action followed easing from the likes of Australia, Malaysia and, later, Canada. Central banks with room to ease are acting to head-off greater financial market turmoil. Fed Chair Jay Powell was very clear about the Fed’s action: “the coronavirus poses evolving risks to economic activity.”

ABN AMRO downgraded its economic forecasts this week, given the spread of the coronavirus around the world. Further rate cuts from the Fed are expected, as we see even more weakness in global economic growth in the first half of this year and, to a lesser extent, in the third quarter. This is expected to be followed by a strong rebound in the fourth quarter and the start of next year. The US is expected to skirt a recession in the first half of this year, with a recovery in the second half.

A mild technical recession for the eurozone as a whole is likely in the first half of the year, given that the coronavirus will weigh on growth. Extra monetary policy stimulus, along with some extra fiscal stimulus, is expected to compensate for the economic damage of the virus. Growth forecasts for the end of this year and for 2021 have been slightly raised by ABN AMRO.

The speed of the decline seen in US Treasuries is exceptional. The drop over the last two weeks was the largest since August 2011. Within this sharp rally, (when bond yields decline, cash prices rise), volatility increased. The intraday trading range for 10-year Treasuries was the largest seen since the flash Treasury rally of October 2014.

For bond investors, we continue to prefer hard currency emerging-markets debt and investment-grade corporate debt. Core eurozone government bonds are avoided, given their negative yields. High-yield bonds also remain out of favour.