perspectives d’investissement
COVID-19: Daily Dashboard
Three levels of response to contain the current shock to H1 2020, limit defaults, and avoid an unemployment spiral
- A public health response: to contain the spread of the virus, and gain time so that cases do not overwhelm hospital capacity
- A monetary response: to avoid a funding shortage and ensure liquidity at a cheap borrowing cost
- A fiscal response: perhaps in the form of tax rebates or income transfers, to partially shield economic actors from the temporary blow.
Public health
- More than 3 billion people across the globe, or roughly 40% of the world population, are now affected by confinement measures in the battle against Covid-19
- Over the weekend, Italy became the first country to record 10,000 fatalities from the pandemic. New cases and deaths however, continue to slow very gradually in the country
- The Spanish government has banned all non-essential work for a two-week period
- Asia remains safe from a disrupting second wave for now, despite economies gradually getting back to work
- The US is now paying the price for a slow and disorderly public health response with new infections increasing exponentially, topping both Italy and China
- President Trump decided against a quarantine of the New York tristate area, issuing a strong travel advisory instead. Mr Trump also extended social distancing guidelines through the end of April
- The number of tests conducted in the US has increased significantly, surpassing 100,000 on 27 March. New detected cases have also increased (over 20,000 on 29 March).
Monetary response
- PBoC cut its 7-day reverse repo rate by 0.2% (to 2.2% from 2.4%) – a larger move than usual. In addition, it injected CNY50 billion in the interbank market this morning. Note that the last injection of liquidity was on 16 March so this was unexpected. It seems likely that further rate cuts in other instruments (the main one-year funding tool for example) are in the pipeline
- The Bank of Canada cut interest rates by 50 basis points to 0.25% and announced the launch of two new programmes for government bond and commercial paper purchases
- The Monetary Authority of Singapore has lowered the midpoint of its currency band and reduced the slope to zero, in line with expectations. The monetary policy easing follows a substantial fiscal package announced by the Singapore government, totalling about 11% of GDP.
Fiscal response
- China’s politburo signalled that it would accept wider deficits this year to boost growth, with the use of special bonds at the national and local level to finance the gap. While this is in line with our expectation of firm fiscal stimulus in the second half of 2020, we believe that the new announcement creates an upside risk to our forecast of fiscal stimulus equivalent to 2% of GDP
- Italy is looking to increase its fiscal support to the economy from EUR 25 billion to EUR 30 billion, while discussions about further fiscal measures are also under way in a number of countries, including France, Spain and the UK
- The debate around a common European fiscal response is intensifying as a group of fourteen countries (including France, Italy and Spain) pressures the remaining group of five states (including Germany, Austria and the Netherlands) to move towards issuing so-called corona bonds to finance the recovery. There could not be a better argument and stronger reason than Covid-19, except perhaps war, to justify the European Union advancing a common emergency fiscal framework. If Europe does not use this opportunity, it is hard to imagine what other circumstances would trigger complete monetary union.
Portfolio positioning
- Based on the substantial public health, fiscal and monetary measures taken so far, we maintain our scenario of a material but transitory shock, but increase portfolio hedges (Japanese yen and gold) to navigate the current volatility. In addition, we regularly re-adjust the equity exposures to take account of the market drift after the declines, so that portfolios can benefit from the eventual recovery
- We have taken the opportunity of improved market conditions to enhance the portfolios’ liquidity profiles by reducing our high yield exposure. We are keeping the proceeds in cash so that we are ready to react rapidly to any change in outlook
- We have also increased our GBPUSD allocation in sterling mandates by 2% following the historic collapse of the currency to levels that, in our view, were not consistent with underlying fundamental drivers.
Information Importante
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