• October 5th, 2020
• By Midsilver Investment Limited

During the examined period, financial markets exhibited consistent growth, following the intense disturbances in March. This uplift in valuations was anchored by both supportive fiscal and monetary measures, especially in select advanced economies (AEs), and indications that the severe economic decline was beginning to stabilize. However, the economic recovery was still partial and vulnerable. Popular forecasts suggested that reverting to pre-crisis growth trajectories seemed improbable, leading to speculations about a potential divergence between the prices of risky assets and the foundational economic projections.

Evident signs pointed to historically elevated valuations in both equity and corporate credit markets. Stock indices in the US and China built upon their gains from April and May, eclipsing their high early-year figures by August. Conversely, the rise in other stock markets was relatively subdued, with the advancements being concentrated among a select group of corporations. Amidst intermittent fluctuations, global stocks in the technology and healthcare sectors flourished, whereas energy and financial sectors trailed, possibly indicative of the pandemic's long-term transformative impact. In the realm of credit, despite indications of weakening credit standards, spreads shrank to historic lows. The surge in issuances across varied ratings, notably within investment grades, even if majorly precautious, further escalated many firms' debt burdens.

Throughout the assessment period, central banks largely stuck to their existing policy trajectories. In the latter part of August, the Federal Reserve presented its revised monetary policy approach, which market players perceived as a sign of extended support. Consequently, interest rates and their volatility decreased, offering significant bolstering to the values of risky assets. As anticipations of inflation reverted to levels observed before the pandemic, real yields in AEs dipped deeper into the negative spectrum. In emerging market economies (EMEs), although portfolio inflows showed minimal recovery, government bond yields receded from their March highs.

Within this backdrop, a blend of dynamics led to the US dollar's depreciation, especially against AE currencies. The swift plunge in US interest rates diminished the dollar assets' yield benefit. The dollar's decline was most pronounced against the euro, boosted by an enhanced policymaking consensus within the eurozone. Generally, the currencies of EMEs stayed consistent, given the tepid global investor interest in local currency assets.