Markets appeared to calm yesterday following the bout of global stimulus to counter the global economic impact of Covid-19; the S&P rallied 6% yesterday and the benchmark 10-year UST is currently trading firmly above 1.10%. Risk sentiment remains fragile however, as seen by the weaker Asian stock bourses and a downward trend, at time of writing, across European exchanges and the US futures market this morning. Moreover, oil has come under further pressure falling to a 17-year low.
Despite an expected deluge of USTs following the ‘big, bold’ stimulus package from the US and the overnight $500bn repo operation, we remain cognisant of the downside risks to global growth, an inevitable global recession. We also wonder whether these measures are enough to boost inflation, which was lacklustre at best pre-coronavirus; we therefore feel haven assets will continue to benefit in the short to medium-term.
Another area of concern is the apparent breakdown in US-China relations, following the expulsion of US reporters from China, reportedly in response to the earlier US’ cap on Chinese reporters in the States. February’s Phase 1 deal appeared to simmer tensions, but with for example Trump referring to coronavirus as the ‘Chinese Virus’ and US growth under threat we may see an escalation in trade war rhetoric. China’s main priority is to support the domestic market following the lockdown. China may therefore struggle to fulfil the Phase 1 trade requirements, clearly a concern to Trump and his re-election campaign. A potential decoupling of the world's two largest economies is a growing concern, amplified by the virus, however, severing relations, especially where we are in the current economic cycle, will only end in a lose-lose scenario.