Overnight the US Senate passed the Bill for the USD2tn stimulus package which now needs to be approved by the House of Representatives. The S&P500 managed to hold on to the previous day’s gain ending +1.15% and the yield on the UST 10 year closed the session at 0.87%. Asian equity markets were mixed, at the time of writing European equities have opened lower and the S&P500 future is currently trading lower and the UST 10 year is currently around 0.81%.
Large swathes of the global economy are in lock down inflicting both a demand and supply shock. Growth projections are looking dire and uncertainty remains in terms of the containment and control of COVID-19. In the absence of a comprehensive program of testing we are still unsure of the actual numbers infected, the numbers that are asymptomatic and the resulting death rate. Set against this, the number of global cases continues to increase (yesterday by 48,461 to 472,686 which was the highest increase since the outbreak began). Hence, we expect asset markets could remain volatile in the short-term. On a positive note, the rate of new infections has slowed for 4 consecutive days in Italy and in China people are returning to work. But countries such as Spain, the UK and US are still in the midst of the outbreak.
However, the stimulus announced so far in Europe pales in comparison to the US and so much more looks to be required with only Germany announcing a really sizeable package of €750bn. More looks to be needed on the part of governments and Eurogroup. While the ECB may have to do more, one positive is that the 33% limit on purchasing a country’s bonds does not apply to the €750 Pandemic Emergency Purchase Programme that has been announced, giving more flexibility.
Against this backdrop, we continue to favour higher quality credit and look for opportunities to rotate amongst these where credits have been unfairly punished in a knee-jerk sell-off. We are monitoring credits in the BBB space that have been punished but it still feels too early to be adding to risk.