Global Weekly: Coronavirus continues to drive markets

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Equity markets remained under the spell of the coronavirus. While in the beginning of the week, investors drove markets to new highs and appeared to be shaking off the potential negative impact from the virus, towards the end of the week, a spike in the number of infections created renewed uncertainty. Statements from the World Health Organization have been ambiguous. On the one hand, member states are urged to take appropriate action to avoid contagion, but, on the other hand, there is also optimism regarding the chance to limit further escalation.

Actions and comments from authorities were generally supportive for equity markets this week. Except for a warning that the coronavirus could disrupt the global economy, comments from US Federal Reserve Chair Jerome Powell were relatively optimistic. He noted that current Fed policy will support sustainable growth and a strong labour market. Moreover, the Chinese central bank is providing market liquidity and using other tools to limit the financial consequences of the coronavirus.

So far, earnings season aggregated results remain modestly positive, but companies are also clearly providing cautionary guidance for the year ahead. This is largely because the potential slowdown in demand from the fallout from the coronavirus is difficult to assess. On the positive side, the global technology giants are reporting strong results, which pushed markets higher. In contrast, companies active in travel, leisure and luxury goods feel the effects of lower demand. Energy and materials stocks also had a difficult week, as they are suffering from dropping oil and commodity prices.

Bonds: investors search for yield

The leading sovereign bonds, including German Bunds and US Treasuries, are trading at higher prices because yields are pressured, due to slower economic data compared with market expectations. (Bond prices and yields move in opposite August 2018 of -0.718%.

Over the last few years, the US has clearly been the leader in economic development, while China and Europe have faced domestic challenges. So far, the first months of 2020 have not delivered any ‘catch-up’ for Europe and China, as had been expected. We assume that these two regions will still benefit the most if the concerns regarding the coronavirus diminish.

The US dollar is benefitting from positive US economic surprises, compared to the eurozone and China; and the US Federal Reserve continues to expand its balance sheet. The European Central Bank (ECB) is reviewing its strategy and has a new Chair. The market view is that it is unlikely that there will an active policy move by the ECB before the summer break. We remain convinced of a rate cut by the Federal Reserve and ECB in the second quarter, with a doubling of the ECB’s asset purchasing programme.

The all-in yields for corporate and emerging-markets credits appear to be trending continuously lower, and the negative-yielding bond universe is again expanding. This spurs investors to search for positive yields, taking them into riskier asset classes. We believe that emerging-markets bonds remain a compelling story for opportunistic investors.