Financial markets are facing an unprecedented crisis and who knows how it will turn out. This is leading to violent price swings across all asset segments, from equities and corporate bonds to commodities and real estate.

The pace of new coronavirus cases seems to have slowed overall, which is encouraging. But the bad news will come from the next sets of economic and corporate earnings figures. According to the OECD, if the lock-down measures to contain Covid-19 are left in place for six months, economic output could shrink by a quarter. It is still very hard to see when Western economies will get back to business and, even then, how long it will take them to get back up to speed.

The unprecedented fiscal stimulus announced (USD 2 trillion in the US and EUR 750 billion in Germany, for example) last week gave markets an adrenalin boost. In particular, the S&P 500 rose by 10.3% and the Nikkei by 17%. In Japan, Shinzo Abe stated that fiscal stimulus measures will soon be outlined. In Switzerland, the SMI recovered last week by 4.5%, spurred on by insurers. Sovereign bonds have also performed well in the risk-off environment, seemingly encouraged by the prospect of mass quantitative easing from central banks. The ECB has removed the 33% limit on debt purchases from any one Eurozone country. Peripheral spreads have also narrowed. Spreads have likewise narrowed for the US investment-grade bonds, which the Fed is allowed to buy up. China’s central bank loosened conditions on Sunday, cutting the seven-day reverse repo rate from 2.4% to 2.2% – the lowest in five years.

However, stock markets have opened lower this week as news about the progressing coronavirus pandemic continued to send a chill down people’s spines. The surge in US cases, with nearly 130,000 reported to date, definitely gives cause for concern. Medical authorities have estimated that the number of deaths could eventually rise to 200,000. Donald Trump has declared an extension to the lockdown and to the social distancing measures until the end of April. In a separate development, the European Council last week failed to agree on a joint response to the Covid-19 emergency. In keeping with the ECB’s recommendations, banks must suspend share buyback plans and dividends, which is further putting pressure on share prices.
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