Bear Market Accelerates, Policy and Virus Containment Efforts Ramp Up
Last Week Review
Bear Market Advances Alongside Virus’s Global Presence
Coronavirus cases continued to accelerate in key economic regions across the globe, including the U.S. and Italy, as global confirmed cases surpassed 285,000. The U.S. dollar rallied as markets expressed concern over when the virus may plateau. Major central banks continued to take emergency measures to alleviate market pressures. Fiscal policy provided some relief, but markets still await broad fiscal support in the U.S. Policy support was not enough to calm investor fears that the virus will impact the growth outlook beyond a couple of quarters. Global equities plunged 11.9% last week as volatility reached record highs. Credit spreads widened with both the investment grade and high yield spreads reaching levels not seen since the global financial crisis.
Bonds Under Pressure
Virus uncertainty has driven increased demand for cash. The U.S. dollar has risen at a record pace, surging over 8% since its early March trough. Last week, the high yield spread rose another 286 basis points to 10.13% and investment grade debt suffered from record outflows. Volatility in credit markets is likely to persist until the number of virus cases slows. Many companies, particularly those within the investment grade space, can withstand a couple of quarters of weakened economic activity. However, many investors are questioning whether the virus’s economic toll will extend beyond that period. Illiquidity exacerbated spikes in yields, as longer-term Treasury yields fluctuated wildly last week.
Central Banks Take Action
The previous weekend, the Federal Reserve held an emergency meeting and cut the target policy rate 100 bps to the 0–0.25% range. The Fed took further action throughout the week, implementing funding programs used in the financial crisis. The European Central Bank also took aggressive support measures, while the Bank of Japan eased policy and the Bank of England and Bank of Australia cut rates. While investors welcome aggressive central bank support, markets are more concerned with the fiscal response and the number of virus cases.
U.S. Congress Drafts Broad Fiscal Relief Bill
The U.S. passed a $100 billion relief bill midweek that included funds for paid sick leave and virus testing. U.S. equities plunged following the announcement of the bill’s passage, signaling the market’s demand for a broader and more substantial fiscal package. Policymakers are now drafting up a third fiscal package worth estimates north of $1 trillion. While the details are still being ironed out, markets should respond positively to a large bill with income replacement and credit support. While fiscal policy can better offset virus-driven damage than monetary policy, its efficacy will be diminished over the long run if the virus persists.
This Week Preview
Virus Containment Efforts Ramp Up
China has appeared to stop the spread of the virus for now, while other governments continue to seek ways to contain it. As the virus advances and containment efforts ramp up, markets will also pay increased attention to ongoing treatment and vaccine developments.
Global Policy Leaders Seek to Mitigate Impact
As the virus intensifies, monetary and fiscal leaders across the globe will continuously seek ways to lessen its economic toll. This week, Group of Seven (G-7) ministers will meet by video teleconference to discuss plans of action and the Bank of England will set policy under a new leader. Investors will also pay close attention to intermeeting actions taken by central banks and developments in fiscal stimulus in the U.S. and elsewhere.
Economic Releases to Illustrate Virus-Driven Damage
This past week, the U.S. labor market showed signs of deterioration as jobless claims surged. Similarly, this week’s flash Purchasing Managers’ Index data is expected to significantly decline, with manufacturing and services sector readings across all regions expected to plummet into contractionary territory (readings below 50 are contractionary). Business and consumer sentiment is also expected to notably fall. Moving forward, economic releases are expected to significantly weaken, but drastically negative surprises may still add to market volatility.
See our latest coronavirus insights.
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