Equity markets have just experienced one of the worst weeks in their recent history, dropping on average from -15 to -20% and experiencing 2 black sessions on Monday and Thursday. The 2019 increase is largely or more than fully erased. European markets bottomed out their 2018 lows, returning to 2013 levels.
How is the situation changing?
According to WHO, the coronavirus outbreak is now a pandemic and drastic containment measures are accelerating around the world. Most businesses, other than the vital sectors, are at a standstill, schools are closed, and many businesses are teleworking or partially unemployed. If these devices seem essential today to stem the spread of the virus and prevent an overflow of hospitals, they nonetheless provoke a very large-scale sudden brake on economic activity. Expectations for corporate profits have already been revised downwards by at least 20% and a global recession now seems inevitable.
In this context, the fall of risky asset markets makes sense, especially after a year in 2019 when they had increased significantly while corporate profits had little or no increase. Especially since the interventions of central banks are struggling for the moment to convince.
On Thursday, the European Central Bank kept its key rate unchanged but announced additional asset purchases (for € 120 billion by the end of 2020) as well as a new long-term bank refinancing operation (TLTRO) on very advantageous terms. The markets were disappointed by these announcements, considered too light, however, as C. Lagarde hammered, the ECB cannot do everything on its own. Given the resources already in place, it is now up to the States to coordinate to set up an ambitious budgetary response. If there was any failure, it was more in the tone of the ECB’s director, who was not very certain, sometimes inaccurate, and which obliged some officials to provide “after-sales service”.
The action of the Fed decided on Sunday was of much greater magnitude. The central bank in fact reduced its rates by 1%, lowing them to 0-0.25%. It also announced major asset purchases worth $ 700 billion: 500 billion in US treasury bills and 200 billion in mortgages. At the same time, coordinated action was taken by the main central banks (United States, euro zone, Japan, United Kingdom, Switzerland, Canada). The objective is to ensure maximum dollar liquidity on the financial markets to prevent a liquidity crisis. This decision is a step in the right direction, in particular because it finally indicates the beginning of a coordination of international institutions.
In addition, it comes at a time when numerous budget measures have been announced in the United States and Europe. Nevertheless, the market reacted negatively by opening sharply lower. At this stage, investor reactions seem to be driven by health concerns and the prospect of a global recession, the extent of which remains to be assessed. For comparison, in 2008 the Fed cut rates to zero in mid-December; nearly 3 months before the market low.
What impact on the main asset classes?
The decline affects all equity markets; however, some dichotomies persist. Energy and the sectors most affected by containment measures – travel, leisure – are significantly more down than the more defensive and / or least impacted sectors – health or food. The Chinese market also continues to outperform developed country markets. On the credit side, although the strongest signatures continue to resist, liquidity fears are rising and the riskiest assets (High Yield, emerging debt) are under attack. Finally, after a long time serving as a safe haven, government bonds deemed safe no longer play their role as a buffer.
Two reasons for this. On the one hand, the large-scale fiscal measures taken or announced by governments will widen deficits and could raise inflation, especially since containment measures tend to be inflationary in nature. On the other hand, investors seem to want to take refuge in cash and therefore sell all other asset classes. Starting with the most liquid, such as US or European government bonds.
What are we doing in this context?
Uncertainty in health, the certainty of a recession, extreme volatility prompt us to remain very cautious. We make every effort to protect the portfolios to the extent allowed by the different strategies.
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