• April 6th, 2020
• By Midsilver Investment Limited

Market optimism took a hit in mid-January due to the escalating concerns regarding the novel coronavirus (Covid-19) outbreak in China. Initially, the positive shift in investor sentiment from October, driven by reduced trade tensions, was steadily rising through the first half of the three-month period reviewed. However, by mid-January, worries about the epidemic's economic repercussions began shaking investor confidence. The varying intensity of the risk aversion that followed, which was inconsistent across different assets and regions, shifted based on the global spread of the coronavirus news. By the end of February, the unstable markets and multiple indications of investor wariness suggested the risk-averse atmosphere was lingering.

The 13 December announcement of a set signing date for the phase-one trade agreement between the US and China reinvigorated the waning stock market momentum. By early January, global stock valuations had achieved new peaks, bolstered by data implying a potential stabilization of manufacturing activity by year's end. Within emerging market economies (EMEs), stock markets of countries deeply intertwined in global value chains (GVCs) seemed to benefit more. The positive mood resulted in steeper yield curves and shrunken corporate credit spreads in advanced economies (AEs) and comparable trends in EMEs. Amid this risk-on environment, market-based volatilities decreased to recent lows, and the US dollar saw a notable decline during this time.

However, the mood shifted starting mid-January, intensifying towards the end of February, as alarming updates about the Covid-19 outbreak emerged. As the potential economic consequences of the outbreak loomed, commodity prices fell, AEs experienced notable reductions in long-term yields, and the US term structure's middle section inverted. Worldwide stock markets oscillated due to the virus news, surrendering their prior advances by February's end. The US dollar gained strength, especially against currencies of emerging Asian nations and commodity suppliers. While there was a slight expansion in credit spreads, credit markets in AEs and fixed income sectors in EMEs held steady, with EMEs still attracting portfolio inflows through February. In summary, by the close of February, indications like a robust US dollar, suppressed commodity prices, elevated market-based volatilities, and a prominent inversion in the US term structure pointed to a prevailing sense of caution.

Throughout this period, the central banks of primary economies retained a supportive policy approach, with some of the larger EMEs further relaxing their policies. In general, investors anticipated stable policy rates in the foreseeable future. However, futures markets did project some additional easing by the Federal Reserve later in the year.