16 March 2020
It would be difficult to capture the extraordinary events of the past week in few words, but here’s a summary.
The catalyst was the OPEC+ outcome, which sent the energy market into a tailspin and spilled over to all segments of financial markets. We saw rapid falls in equities, incredible volatility in bond markets, a stunning lack of coordination relating to COVID-19, poor communication from authorities (both political and monetary) and a sense of utter panic on Thursday.
The results? The S&P 500 fell -9.5%, European bourses fell more than 10% and European, non-German yields went through the roof, with Italian 10-year BTPs yield up 65bps in the few hours following the ECB comments.
We could almost be forgiven for forgetting that some sizeable fiscal packages have been announced.
On the monetary front, the ECB announced €120 billion of additional bond purchases and a further TLTRO to support credit in the EA. The Fed announced extraordinary repo measures, which amount to $1 trillion per week for the remainder of March. The BOE made a 50bps emergency cut in rates and provided incentives to lend. The BOJ stepped into the repo markets, as did the Bank of Korea, to help liquidity.
Meanwhile, on Sunday 15 March, the Fed slashed rates to zero and announced a $700 billion asset purchase package seeking to provide liquidity and assuage markets. Markets did not react positively, however, and risks of whipsaw moves continue to abound.
Bond volatility, in particular, has been extreme. The fall in the 30-year US Treasury yield was on a par with 2008 moves and, on some days, even greater.
Source: Bloomberg Finance L.P., as of 13 March 2020. Past performance is not an indication of future performance.
Go global and neutral with Global Agg and ACWI or hide in a safe place with T-Bills
When it comes to portfolio allocations, ETFs have helped many investors re-position. Given the wide gyrations during the week in equity and rates markets, neutrality is a reasonable approach to adopt. Just as COVID-19 has no borders, neither do markets.
It remains too soon, in our opinion, for high conviction views on one segment versus another, given how fluid the situation remains. For all the support they can give an economy, fiscal and monetary measures cannot do much against the virus itself. Coordination around health management will help but seems somewhat lacking at an international level at present.
At some point, economic data will be written off and the eventual curbing of the COVID-19 cases of infection and deaths may provide a trigger for market participants to become more active and deploy their dry powder. The second derivative of the number of cases is important; flattening that curve is crucial.
In the meantime, we see advantages to keeping exposure neutral through any of the following:
Source: State Street Global Advisors, S&P Dow Jones Indices LLC, as of 13 March 2020. Characteristics are as of the date indicated and should not be relied upon as current thereafter.
Sources: Bloomberg Finance L.P., for the period 5 March– 12 March 2020. Flows are as of date indicated and should not be relied upon as current thereafter
Marketing communication. For professional clients only.
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Switzerland:The collective investment schemes referred to herein are collective investment schemes under Irish law. Prospective investors may obtain the current sales prospectus, the articles of incorporation, the KIID as well as the latest annual and semi-annual reports free of charge from the Swiss Representative and Paying Agent, State Street Bank International GmbH, Munich, Zurich Branch, Beethovenstrasse 19, 8027 Zurich as well as from the main distributor in Switzerland, State Street Global Advisors AG, Beethovenstrasse 19, 8027 Zurich. Before investing please read the prospectus and the KIID, copies of which can be obtained from the Swiss representative, or at spdrs.com
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