global perspectives

    Floor under markets but not under the economy

    Floor under markets but not under the economy
    Salman Ahmed, PhD - Chief Investment Strategist

    Salman Ahmed, PhD

    Chief Investment Strategist

    The unprecedented stimulus from both governments and central banks is starting to make a pronounced impact on asset markets. Financial doom loops, which were taking hold, continue to heal while both monetary and fiscal stimulus continue to build.

    Following the Federal Reserve’s lead, the European Central Bank (ECB) has taken an intermediate step towards buying junk bonds directly. The Fed’s top-up of its programme to buy corporate credit1 announced on 9 April has already made a huge impact in credit markets, despite the latest programme still waiting in the activation queue. On the fiscal side, the US has increased stimulus by another USD484bn, and the Eurozone continues to move towards a more mutualised approach to fiscal stimulus (despite political noise).

    The outlook for an eventual exit remains clouded by uncertainty as countries begin to diverge in the pathways ahead.

    These extraordinary actions have saved the system from complete collapse and appear to have put a floor under markets, helping volatility continue to retrace from extreme levels witnessed in March. That said, even as COVID-19 infection and death rates stabilise globally on the back of nearly universal shutdowns induced by social distancing, the outlook for an eventual exit remains clouded by uncertainty as countries begin to diverge in the pathways ahead.

    Activities requiring close social proximity will struggle to bounce back anytime soon, and work remains on mass testing, and track and trace infrastructure before lockdown exits can become a reality. In addition, a second round of infections in some Asian countries continues to show the dangers of an early exit.

    On the data front, high frequency survey indicators continue to show the extent of the non-linear damage from lockdowns. In addition, the extreme dislocation in oil witnessed recently shows the unprecedented impact of demand destruction on the physical infrastructure supporting oil markets, despite the reversal of the ill-timed price war. Lastly, Q1 earnings data is being released with extremely cautious guidance from various companies.

     

    Increased dispersion favours credit and convexity

    However, unlike in March, dispersion both within and amongst risky asset classes has increased significantly as systemic risks remain under control. One key dimension of this increased dispersion is the view around central bank support and backstopped assets. As discussed previously, we continue to think that corporate credit remains relatively more protected2 going forward even if the uncertainty around future economic outcomes is highly likely to remain at very elevated levels.  

    We continue to highlight the importance of convexity in this environment as central bank influence reaches unprecedented levels, requiring both focus on upside potential and robust risk management.

     

     

    sources.

    1 The Secondary Market Corporate Credit Facility.
    2 Capital protection is a portfolio construction goal that cannot be guaranteed.

     

    AM-WeeklyMarketUpdate-24-Apr_CIOs-LOcom.jpg

    Read our CIO views

    The dispersion of exit strategies and expectation of continued volatility lead us to keep our focus on rigorous risk management. Our CIOs consider how to position portfolios to weather on-going volatility, with an eye on the upside potential of the exit.

     

      Read more here

    important information.

    This document has been issued by Lombard Odier Funds (Europe) S.A. a Luxembourg based public limited company (SA), having its registered office at 291, route d’Arlon, 1150 Luxembourg, authorised and regulated by the CSSF as a Management Company within the meaning of EU Directive 2009/65/EC, as amended; and within the meaning of the EU Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMD). The purpose of the Management Company is the creation, promotion, administration, management and the marketing of Luxembourg and foreign UCITS, alternative investment funds ("AIFs") and other regulated funds, collective investment vehicles or other investment vehicles, as well as the offering of portfolio management and investment advisory services.
    Lombard Odier Investment Managers (“LOIM”) is a trade name.
    This document is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This material does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. This material contains the opinions of LOIM, as at the date of issue.
    Neither this document  nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
    Source of the figures: Unless otherwise stated, figures are prepared by LOIM.
    Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources.
    Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.
    No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Funds (Europe) S.A prior consent. ©2020 Lombard Odier IM. All rights reserved.

    related insights.

    related content.