Direct – Sally Ismail: Is what happens in the global markets recently after the outbreak of the “Corona” epidemic is a repetition of what happened in the financial crisis in 2008?
The answer was given by Mike Pyle, chief global investment strategist for Black Rock, during an analysis published by the blog of the largest asset management company around the world, where he believes that the shock of the Corona virus is not supposed to spark a crisis similar to what happened in 2008.
The outbreak of the Coruna virus is likely to lead to severe and deep economic shock, similar to a massive natural disaster.
The markets are concerned about the economic impact, which is evident by the actions that remind us of the global financial crisis in 2008, but we – Black Rock – believe that the current situation is different.
The measures of social divergence to combat the spread of corona will greatly reduce economic activity, but this shock is assumed not to seriously disrupt the global economy, provided that the authorities provide a strict and comprehensive response in fiscal and monetary policy.
Total returns since peak in 2008 and 2020 crisis – (Source: Black Rock)
Advanced market shares have fallen as much as 27 percent since the February summit, but cut losses on Friday.
The size of this sell-off is similar to that recorded in the wake of the 2008 Lehman Brothers bankruptcy.
Market volatility has also risen sharply, as the VIX index to monitor volatility in the US stock market has jumped to its highest levels since the global financial crisis.
We also witnessed sharp fluctuations in the fixed income markets, as US Treasury bond yields fell to record low levels first and then closed at high levels in the same week.
Oil prices also recorded last week, the biggest daily decline since the Gulf War amid a conflict between OPEC and Russia, which led to the failure to take a decision regarding the reduction of crude supplies.
What will it take to stabilize the markets? We believe a strict, proactive and coordinated policy response is key.
This includes robust health measures to curb the spread of the epidemic as well as coordinated financial and monetary easing to prevent disturbances in income flows – especially for families and small businesses – that may cause permanent economic damage.
The evolution and global spread of the outbreak of the Coruna virus is highly uncertain.
What we know: Measures of containment and social divergence will automatically stop economic activity, as happened in China and Italy.
There are strong incentives to take such measures proactively to slow down the growth rate of corona infection, as France and Spain joined Italy over the weekend to impose strict closures.
The impact on economic activity is likely to be severe and deep.
However, we believe that the more severe the measures taken, the deeper the economic blow will be in the near term, but it will increase confidence in the recovery after these measures are canceled.
We feel that the shock is like a large-scale natural disaster, which led to severe disruption of activity for about one or two seasons, but ultimately leads to severe economic recovery.
The main premise underlying this vision
Policymakers are working to achieve economic stability and prevent severe crises related to cash flows that would lead to financial pressures and push the economy into a financial crisis.
On Sunday, the Federal Reserve cut interest rates to near zero, and announced a $ 700 billion bond purchase package and other measures to ensure proper market performance.
The Fed also made arrangements with other central banks to make funding available in US dollars.
Earlier, the White House announced funding for disasters while the US Congress is due to pass a bill to cover health care and paid leave for some workers.
A greater financial response can be achieved given the growing recognition by Congress that this is necessary.
The United Kingdom last week presented a coordinated set of measures, including the Bank of England rate cut and a budget announcement that includes reducing the burden to affected sectors.
This, and similar steps by Canada this past week, are a type of coordinated fiscal and monetary measure whose importance has been indicated to deal with the upcoming downtrend in the economy.
The European Central Bank made a real easing of the banking system at the heart of financing the eurozone economy, and many European countries indicated that they would greatly facilitate fiscal policy.
However, the ECB’s move did not materialize the “do whatever it takes” package that markets had anticipated, and bond yields for some countries experienced a sudden jump.
Short of saying
Black Rock downgraded its position on risky assets to “benchmark weight” due to the actual uncertainties associated with the outbreak and its impact, including how effective public health measures are and how long the virus risk will last.
The large decreases in bond yields have led to a decrease in the support provided by government bonds to offset the sales waves caused by risky assets, which reduces the benefits of diversifying investment portfolios.
And the world’s largest asset management firm still prefers to hold US Treasury bonds than its lower-yielding counterparts to support the investment portfolio.
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