Florent Bronès, Chief Investment Officer

Volatility levels in the markets are still very high and short-term uncertainty huge.


Trading on 18 March was rather challenging as prices for almost all financial assets fell and safe havens were few and far between.  Shares plunged, bond yields rose (meaning a decline in the value of bonds), oil hit new record lows ($25 per barrel of Brent, rebounding this morning by more than $2). Even gold dropped, as in previous days!  The dollar continues to play its role as a safe haven. This morning (19 March) was relatively calm (dips on Asian stock markets, a rebound in European markets and in oil prices, stable US futures).

With regards to the Covid-19 pandemic, the situation continues to deteriorate in Europe, the epicentre of the epidemic at present, with a jump in the number of infections and deaths. However, a positive precursor sign is that the pace of the increase is slowing down in Italy and Spain, something which will be confirmed over the next few days.

Two pieces of bad news today: some Asian countries are seeing another rise in the number of infections, this time from abroad (Europe and the United States). Although we are talking about a small number of cases, it is enough to intensify fears of a second outbreak. Moreover, reported infections are soaring in the United States (+45% yesterday) and the United Kingdom (+35% yesterday), two countries which seem to be lagging Continental Europe by a few days.

The various responses in terms of economic policy are accelerating and intensifying. Yesterday, the ECB increased the size of its bond-buying programme (QE, Quantitative Easing) to €750 billion. It specifies that this huge amount may be further increased, if necessary.  It will buy public (including Greek) and private securities. And it extends this programme to commercial paper, following the Fed's example. Finally, it expands the list of eligible collateral.

The Fed has implemented further measures, including expanding the list of eligible collateral, and ensuring the smooth functioning of the US money market. These tools were used during the financial crisis of 2008/2009, albeit on a smaller scale.

We note intervention from other central banks, for example, in Australia (a QE programme targeting a low bond rate target) and in South Korea (a traditional QE programme). 

(Table available in the pdf at the end of the article)

This central bank and government intervention is having an immediate impact on bond markets, and we are seeing a steepening of yield curves. Short-term rates remain low, close to 0 or negative in Europe and Japan, as central banks are amplifying monetary expansionary measures.  The long ends of the curves, on the other hand, have risen as issues by various governments will accelerate. Bond markets are starting to price in an economic recovery; this is the U-shaped pattern expected to materialise for economies, interest rates and stock markets.

The risk of a credit crunch is still present.  Liquidity conditions in some market segments are deteriorating. In short, "fire sales" are taking place and fuelling volatility.  Some UK real estate funds (REITs) have just taken the decision, supported by the authorities, to gate temporarily to avoid selling at heavy discounts.

We stick to our core message. Even today, panic-stricken fear makes people forget that economic policy tools are very powerful. But the timing of the rebound will depend on news about the pandemic that is, by nature, unpredictable. Finally, investors should watch for opportunities for the medium- to long-term horizon.