(Vir)alteration of investor optimism

Financial markets staged a strong start to the new year, propelled by the ‘phase one’ US/China trade agreement. And yet, a new spectre has caught the markets. The confirmation of human-to-human transmission of the Coronavirus on Jan. 20 and a first US case a day later caused risk sell-off in the second half of January.

Highlights:

  • Just as the trade truce provided broad-based relief, the Coronavirus is unsettling global markets.
  • The fast-spreading disease is challenging the tender global macro green shoots, but we still see resilience in US and EA domestic demand.
  • Experience from past episodes suggests that markets tend to overshoot, but rebound sharply once the number of new infections starts to slow.
  • Even before the Coronavirus, we had embraced a slightly more cautious stance on early signs of investor complacency. We maintain a (smaller) prorisk tilt in the portfolios, but reduce overweights in Equities and HY Credit. We keep our overweight in IG corporates and underweight in core bonds.

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(VIR)ALTERATION OF
INVESTOR OPTIMISM

RELATED INSIGHTS

COVID-19 FACTS & FIGURES
Pfizer and BioNTech candidate Covid-19 vaccine showed to be 95% effective in early analysis, an even better result compared to data released last week. Moderna candidate Covid-19 vaccine showed to be 94.5% effective in early trials involving 30,000 people. Switzerland announced ICU beds reached full capacity and no extra units are available. Oxford and AstraZeneca Covid-19 vaccine test results are expected by late December.
EUROPEAN DEFAULTS LIKELY TO STAY LOW
Since March, credit markets have retraced a large part of the Covid-related spread widening, alongside rebounding risk sentiment. Although the rally has been substantial, it has remained defensive with IG outperforming HY on a beta- adjusted basis. The main reason in our view have been concerns about rising defaults.
US: SPLIT GOVERNMENT NOT TOOTHLESS ON GROWTH
Narrow margins in several key swing states sent Democratic candidate Joe Biden to the White House. However, Republicans are more likely than not to keep the majority in the Senate, with voters in Georgia having their final say on two decisive seats on Jan. 5.