Weekly recap: Should we try to catch falling knives? The spread of the coronavirus in the US and Europe (Italy, Spain, France, Germany, Switzerland, Nordics) dragged risk assets drastically lower in recent days. The shock to equities was at levels not seen since 2008 (VIX spot close to 70, S&P drop from peak at 25%). HY credit spreads widened markedly but remain below the extreme levels seen in 2011 and 2016.
The ECB announced a broad package at its regular meeting but Lagarde made clear that the response should be fiscal and not monetary in nature. The market did not appreciate the news. Measures adopted include additional LTROs to bridge the gap until the next 3-year refinancing operation in June 2020, and additional asset purchases (€120bn through the end of the year). There were no apparent liquidity shortages in money market but the situation can change rapidly. The Fed and The BoE cut rates aggressively. Yet, the monetary response cannot deal with the lockdown of several dozen of million people.
Fiscal authorities have been rolling out stimulus measures as well. Italy beefed up fiscal stimulus with a first package worth about €12bn and an additional reserve worth €13bn. Spain and France announced tax credits to support SMEs. In the US, Trump proposed a suspension of US payroll taxes, paid sick leave for hourly workers and $50 billion in additional loans for small businesses.
Scenario Asset Classes: Keep a lookout for how Coronavirus evolves in the US
Although the selloff has been extremely violent, we have little visibility on the way the coronavirus will spread in the US and how it will be addressed. The coronavirus is just starting to spread nationwide in two main areas (East and West coast). But the equity market valuation has grown attractive (though earnings will be revised down). We stay constructive in the medium term for risk assets but fear more volatility in the ST. Caution on HY credit. Small tactical buy bets on equities do make sense, bearing in mind that the coronavirus newsflow will not improve.
Market movers ahead: Preliminary surveys for March will be available (U. of Michigan consumer sentiment). Watch the March ZEW survey in Germany.