Cross Asset Investment Strategy

Wednesday 11 March 2020

The spread of coronavirus outside China has rattled risk assets in the recent trading sessions. Investors triggered some profit-taking in markets, which reached historical highs and even broke psychological thresholds in previous weeks: European Stoxx 600 moved above the 20-year broad trading range. The atmosphere of fear has remained consistently high only in the so-called safe assets — the USD, UST, and gold — signaling that investors have been looking for effective hedging strategies. Our central scenario is for a temporary deterioration of the global economic picture in the first quarter of this year, with some possible spill over into the second quarter, given that weaker-than-expected global trade growth is ultimately affecting industrial production and manufacturing activity and there are some impacts on the internal demand. After that, we should see a recovery over the remainder of the year. Overall, in our scenario, global growth has been downgraded to 3.0% from 3.2%. Read More

Clearly, the main risk now is the unwinding of recent market complacency and the reaction of “animal spirits.” The good run in risky assets has been driven by investors who believe (1) coronavirus episode will be temporary (our central scenario); (2) a worsening situation will trigger more Central Bank (CB) action; (3) they have no alternatives, given the moves of safe-haven assets. Therefore, we can expect to see some profit-taking, short-term market volatility, and overreaction.

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Latest From the Markets : 31st March 2020

China has just published its PMIs (Purchasing Managers Indices) for March. The good news is that both indices are around 52, i.e. above the threshold of 50, which separates expansion from contraction, showing that the recovery in the production of goods and services in China is underway. The data should be considered carefully, however, because a return to production in March may well be counterbalanced by the slowdown in global demand elsewhere, so we cannot extrapolate a positive trend in the near future. However, the data is above the forecasts, which expected to see the PMI manufacturing index at 45, so that is good news.