1. Jeckyll and Hyde financial markets

While the COVID19 epidemic dominates the global 24-hour news feeds, it seems to be having curiously little effect still on risk assets, most notably the global stock markets (outside of Asia). Both the US and European stock markets continue to fresh multi-year highs, merely confirming the old stock market adage that “the trend is your friend”.

Even in Germany, where economic growth stalled in the fourth quarter of 2019, the trend is solidly higher for the DAX index, even with all the troubles of the Auto sector (VW, BMW, Daimler) supposedly weighing it down.

German DAX index hitting new multi-year highs


All that being said, so-called “safe haven” assets are simultaneously doing well, with gold inching higher and US Treasury bonds also rising, mimicked by the falling of US 10-year bond yields back close to historic lows.

US 10-year Treasury yields fall close to historic lows


The simple explanation for the strong performance by both equities and bonds at the same time is the belief that there is a central bank “put”. That is to say, that events will likely take one of two courses from here:

  1. The spread of COVID19 is peaking now, and will start to decline over the next few weeks, allowing China to gradually get back to work and limit the human cost and also economic cost.
  2. The spread and effect of COVID19 worsens, requiring more drastic measures by global authorities to get it under control. Under this more pessimistic scenario, the financial markets seem to believe that central banks, led by the US Federal Reserve, will inject further liquidity into the global monetary system to support growth, likely including cutting US interest rates.

The problem I see is that, in the short-term at least, the higher that stock markets go, the greater the risk of some correction if (1) is not correct but rather (2). There is still simply not enough reliable data to conclude that option (1) is likely at this point, so I see that the potential for the greater global spread and effect of COVID19 remains a live risk for us all.

A good podcast discussing a number of issues around COVID19 and financial markets can be found in the excellent The Investors Podcast series with Erik Townsend:

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