Asian markets remained hovering in cautious territory even as they rebounded following the pummelling of US stocks on Black Monday with the Dow Jones suffering its biggest ever point drop of 2,014 points or a 7.8% fall, which is the worst since the 2008 financial crisis.
At the time of writing, Dow futures were trading up 600 points or 2.5% after US President Donald Trump urged lawmakers to enact a payroll tax cut as well as provide assistance to hourly rated American workers affected by the coronavirus (Covid-19) contagion. Nasdaq and S&P 500 futures were last up more than 2.5% each. All three indices are now nearly 20% below their most recent highs.
Bond yields have also recovered from Monday’s historic lows of 0.31% to 0.7% on expectations of coordination among central banks in their monetary policies, to be augmented by fiscal stimulus from governments around the globe to counter the ripple effects of the virus on global economic growth.
The rout on Wall Street was triggered by the failure of OPEC led by the Saudis to agree to cuts in oil production quota with Russia, which led to oil prices plunging by 30% to around $30 per barrel, or levels rarely visited since the 1991 Gulf War.
The feud had not come at a worse time as it compounded the effects of already falling oil demand from transport and manufacturing sectors reeling from the impact of Covid-19 which has spread to more than 100 countries since it surfaced in Wuhan, China last December.
The onus is now on both the Saudis and Russia to get back to the negotiating table to sort out their differences on output levels as prolonged depressed oil prices will also have dire consequences for other oil producers whose national budgets are usually based on prices at around $60 per barrel.
US oil futures were last up about 5.2% to $32.76 a barrel, while the global benchmark Brent crude rose 6.2% to $36.48 a barrel.
On the Covid-19 front, there are emerging signs of optimism with continual declines of new cases out of South Korea from 500 last Thursday to 240 on Sunday and 169 on Monday. The drop in new cases in China has even prompted President Xi Jinping to pay a visit to Wuhan, the provincial capital of Hubei and the original epicentre of the viral scourge, as a show of confidence that China may have turned the corner. The number of new cases has trickled to 17 cases in Hubei and two in other parts of China, both linked to overseas travel. That was in contrast to the thousands of new cases at its peak in January.
Stay calm and position for 2H20 rebound
The global economic trajectory was on pace for a modest rebound in 2020. The corporate profit outlook was solid and inflation risks benign, setting up global markets for solid cross asset returns in 2020. However, all economic trend analysis will be on “hold” until the Covid-19 outbreak subsides due to elevated levels of uncertainties.
We view the Covid-19 outbreak as a deflationary shock. While, the economic and earnings effects are likely to be transient, the deflationary impact is likely to be prolonged with global monetary easing having a more lasting effect on suppression of global bond yields.
Our base case is that economic growth will rebound in 2H20 with equity markets likely to see full recovery. Bond yields may have overshot in their declines, but most of the bond rally will be sustained.
Assessment - We remain neutral in equities and fund a slight overweight in fixed income by underweighting cash and commodities. We continue to overweight credit within fixed income and overweight on alternatives. We expect market volatility in reaction to Covid-19 but would ultimately recommend positioning for a rebound if markets get too risk-off.
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