InvestNow News – 13th Mar 20 – AMP Capital – Fallout from Covid-19 – a fixed income perspective
9 Mar – Warren Potter – Senior Portfolio Manager
As novel coronavirus or COVID-19 moves from just a Chinese outbreak to something approaching a global pandemic event, market volatility has increased substantially and market liquidity is becoming more constrained. The economic fallout from the virus has transitioned from something akin the SARS outbreak where there was a reasonably quick V-shaped rebound in economic activity to something more U-shaped where growth takes longer to stabilise and improve.
There is also an increased risk that the event spirals into a more recessionary scenario, with significant slowing in growth and job losses and firm closures. The impacts are already being felt in terms of earnings downgrades across a raft of industries impacted by the virus, including airlines, airports, hotels, tourist businesses, oil and commodity producers, IT, automotive, shipping and freight businesses. The list of affected businesses is growing as supply chains remain impacted.
As a consequence of this uncertainty, equity volatility measures such as the Chicago Board Options Exchange Volatility Index are at levels not seen since the Global Financial Crisis (GFC). Similar volatility measures for fixed income are also significantly elevated, but not quite at levels seen during the GFC. Liquidity measures reveal widening spreads, and reduced volumes available to be executed close to best bid and offer across equities and fixed income show the increasing risk aversion in markets.
Risk markets remain under pressure with large falls in equity prices and widening credit spreads.