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.




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



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

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