Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Our checklist for equities, earnings to watch and stocks that are up
Peter Garnry
Chief Investment Strategist
Summary: Equity markets are up to as the Fed has announced open-ended buying of Treasuries and MBS which is indirectly yield curve control. In addition the German government has signed its EUR 750bn stimulus package to help the economy. But before we can get constructive on equities besides the daily ebbs and flows to news we need to see four things happen which we present in this equity update. We also highlight which earnings releases investors should watch this week and finally we look at some of the stocks that have had positive returns despite of the COVID-19 crisis. Not surprisingly we find positive stocks in pharmaceuticals and those that see rising demand on work-from-home trends.
Our optimism on Friday in our research note Have global equities turned a corner? turned out to be a bit premature although many seeds for a turnaround have been planted by policymakers. But like a river it takes time for things dumped in one end to float downstream. One of the main policy actions that’s being scoped in Europe is the idea of coronabonds (read Coronavirus Economics: The case for coronabonds) which will be joint debt issued by the EU. In general the speed of information during a severe crisis is extremely high so we encourage clients and investors to read our daily Market Quick Take.
The biggest news today is the Fed announcing that it will do open-ended Treasury and mortgage-backed securities buying in whatever amount that is needed – this is indirectly yield curve control by design in order to keep marginal cost of funding down. The German government signs off on a €750bn stimulus package to fight the economic impact from COVID-19. In addition the German government has agreed to set up a $600bn rescue fund to provide loans, guarantees and take equity stakes in hard hit companies. The reaction to these measures has been very positive across risky assets.
Four things to watch
Over the weekend we were thinking about a checklist of things we would like to see for us to be constructive on equities again.
- Stronghold (our dynamic asset allocation model) to add credit in a repeat of 2008 actions
- VIX futures term structure turning positive (Read Turning point indicators #1 – VIX futures term structure)
- Financials to significantly outperform utilities (read Turning point indicators #2 – Financials to utilities ratio)
- Clear signs of COVID-19 cases and death in the US are flattening (use worldometer for monitoring the development)
Our Stronghold model is now experiencing a market environment that is even more tough than in 2008. In the backtest simulation the market crash evolved slowly enough for the model to be ultra-defensive going into the Lehman Brothers chaos. But more importantly Stronghold was able to aggressively put on risk early on. Already by 17 April 2009 the portfolio had 48% exposure in credit and by 15 May 2009 it had increased exposure to 84%. But it started adding risk on 20 March 2009, so what we would like to see in this crisis is Stronghold to increase exposure to risky assets before we get constructive on equities.
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