Yesterday, markets traded with a risk-off bias on concerns about rising virus infections in the US and Europe, the failure to agree a further fiscal stimulus in the US and the added uncertainty ahead of the US election next week. While polls favour Biden to win the Presidency, a contested election is not out of question, and it is less clear whether the Democrats will win control of the Senate. The path of the virus remains a concern, particularly for Europe where France and Germany were forced to announce more stringent lockdowns overnight, a clear risk to the economic recovery. Thus, given this increase in risks to the downside ECB President Christine Lagarde’s comments later today will be closely watched and are expected to emphasise that the ECB stands ready to take further action if required. This sentiment was evident earlier today at the BoJ meeting and press conference.
The Bank of Japan kept interest rates and asset purchases unchanged with the post meeting statement noting: “For the time being, the Bank will closely monitor the impact of the novel coronavirus (COVID19) and will not hesitate to take additional easing measures if necessary”. BoJ Governor, Haruhiko Kuroda echoed this sentiment in the press conference: "There's no change to our stance of being open to extend the March 2021 deadline for the crisis-response programme, depending on future developments regarding the pandemic. We will extend the deadline, if we deem it necessary and appropriate."
The BoJ did adjust its economic forecasts and warned: “The outlook for economic activity and prices provided in this Outlook Report is extremely unclear, since it could change depending on the consequences of COVID-19 and the magnitude of their impact on domestic and overseas economies.” The report also noted “risks to both economic activity and prices are skewed to the downside, mainly due to the impact of COVID-19.” The median GDP forecast was revised down to -5.5% for FY2020 from -4.7% earlier in July. Growth estimates for FY2021 were revised up to +3.6% from +3.3%. The inflation forecast was also edged lower to -0.6% for FY2020 from -0.5% in July but edged up to +0.4% in FY2021 from +0.3%. BoJ Kuroda reiterated at the press conference that the 2% inflation target remains appropriate and pushed back against the idea that it needs to be changed.
Given these significant uncertainties about the outlook for global growth, we favour high-quality investment grade bonds, particularly sovereigns and quasi-sovereigns backed by wealthy nations which we view as having a very attractive risk-reward profile.