Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Asia on track for gains, but what's next
Summary: A mixed day in Asia as US futures decline, along with the USD.
Another mixed day in Asia, most of the region advancing following the recovery in risk after three consecutive days of gains sustained on Wall Street, whilst Aussie and Kiwi stocks follow US futures lower. ASX200 -4.70%, NZX50 -0.79%, KOSPI +0.47%, Hang Seng +1.21%, Shanghai +1.60%, Nikkei +2.01% at the time of writing. However, the bear market bounce puts the MSCI Asia Pacific index on track for its best week since 2011. The continued pullback in the USD as well as the unprecedented whatever it takes backstop from the Fed, anticipation of the $2trn US fiscal stimulus package and short covering all helping to lift equities off lows.
China today posted the biggest industrial profits fall on record, but the markets focus is elsewhere. The S&P 500 has now retraced 38.2% of its decline from mid-February, but with breadth and volume declining in the Thursday session relative to Wednesday. Whether quarter end rebalancing, stimulus optimism, or just the classic example of a vicious bear market rally following a violent sell-off, as we saw overnight with initial jobless claims all but cementing the path to recession posting in excess of 3mn, the market is in the mood to shrug off the data (for now!). Commodity markets however have not joined the party as copper trades lower along with crude oil. And as we said previously, there is a real disconnect between the real picture which is cascading unemployment, bankruptcy headlines and a true “bottom” in equities.
Meanwhile, the US has now surpassed China in confirmed COVID-19 cases and the immunologist, Dr Anthony Fauci, who serves as a voice of reason the White House Coronavirus task force states, “We are in the escalating phase of a very serious pandemic. That is a fact. We have got to realize that and to prepare and respond. It is not, as it were, under control. Because it's still going up.”
The US is still early on in the infection curve, and the recent rally in risk sentiment is at odds with this outlook. Rightly or wrongly, it is clear by now the markets are not just looking for stimulus measures, monetary and fiscal, to relieve the pressure on risk assets, the more pressing matter is the containment of the virus itself. Markets will not stabilise without the spread of the pandemic slowing with an eye to lockdowns being lifted. Ultimately, we do not yet know the scale of the problem and the task of estimating the depth and duration of the hit to economic growth and earnings is near on impossible at this stage. Even those best placed, the companies themselves have opted to withdraw guidance on earnings. Moreover, the dispersion in analyst and economists’ forecasts for the hit to EPS growth and GDP highlight the level of uncertainty that prevails. We are sceptical of a lasting relief rally until contagion under control, transmission rates reduced and the infection curve flattened. In addition, despite the record setting rally this week, with VIX at 61.00 (a ninth consecutive close above 60, unprecedented!) and VVIX at 169.6 it would be premature to sound the all clear. Shutdowns are becoming more broad-based in Europe and Asia and have the potential to last longer than is currently estimated, the underlying assumption is that shutdowns are lifted and activity bounces back by the 2H and there is no re-infection resulting in another round of shutdowns. Resurgent cases in HK and Singapore and extended containment measures, perhaps indicating that going all in on those assumptions right now is not wise.
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