Investors fled risk assets last week given the extent of Coronavirus outbreaks outside of China and the potential for an increased spread in the US. Yields have dropped on US Treasuries to all-time lows and we saw a violent correction to equity and commodity prices. Although the likelihood of contracting the Coronavirus is low and the mortality rate even lower, the psychological impact has taken its toll on public markets. CIO offices around the globe continue to analyze the range and associated impact of this pandemic. Investor’s lack of confidence in the authorities to handle an expanded outbreak is likely to keep markets on edge for the medium-term, even after the correction last week.
The main event this week is Super Tuesday in which fourteen states will vote in the democratic primary. As Bernie emerges as the front runner for the Dems, there is trepidation that his Presidency would mean drastic policy shifts that most expect would be damaging to the market. The handling of the virus in the US will have a substantial impact on President Trump’s re-election bid. Thus, markets are not only digesting the global slowdown related to COVID-19, but also the reality that President Trump is no longer a lock for a second term.
Super Tuesday results and the announcements of the number of infection cases will determine this week’s tone. This week’s key data (February jobs report & PMIs) and the promise of central bank support becomes background noise at this point. If Bernie Sanders wins on Tuesday watch for the risk tone to weaken further. Meanwhile if Joe Biden comes out on top this could set a floor for markets as a more middle-of-the-road candidate will not stoke the same uncertainty for investors. Either way, investors should settle in for a long March with continued volatility.
YTD Returns as of EOD Friday 02/28/20
US Barclays Agg +3.76%, 1.68% yield, -88 bps excess returns
US Barclays Corp +3.71%, 2.40% yield, -263 bps excess returns
UST 10yr 1.156%, -76 bps
S&P 500 2,954.22, -8.56%
DJIA 25,409.36, -10.96%
OIL (WTI) $45.26, -26.06%
Gold 1,587.30, +4.43%
Fixed income markets remained relatively calm this week as the new administration begins its 100-day plan, with investors still weighing how policies will affect their portfolios.
Fixed income investors are anticipating additional stimulus but fear inflation on the back of increased government spending; Powell reiterates that bond market programs won’t be tapered soon.
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