Global equity markets and commodity prices are experiencing one of their worst drawdowns in the past 20 years.  The recent 15% drop in global equities from their peak has resulted in about $6 trillion being wiped off the market capitalization of global equities, with the MSCI All World Index down 11% year to date. Slow output normalization in China with a broadening outbreak globally of the Coronavirus with 58 countries now reporting infections have motivated large cuts to first quarter GDP growth projections. This has also lead to large cuts in second quarter GDP growth projections as the epicentre of the epidemic has spread from China to Europe and other parts of SE Asia with the USA becoming the newest focus of the COVID 19 crisis, despite a very low number of actual cases (60). Markets are now meaningfully starting to discount a global recession as the very weak data out of China points to a meaningful contraction in the Chinese economy in the first quarter of 2020. Already the consensus 2020 S&P EPS has been cut from $180 to $174.

Markets hate uncertainty and some stability in risk assets is only likely to emerge once there is a definite peak in US/European infection rates and a slow decline to a single digit pace. In the meantime, several governments are stepping up their easing efforts both monetary and fiscal, particularly in SE Asia. Fed Fund futures rates are pricing in more than 60 basis points in Fed rate cuts by mid-year 2020. US long bonds have hit new all-time lows surpassing the lows in 2016 with the US 10 year at 1.25%. It is of course possible that the Coronavirus delivers the world’s first pandemic induced recession, but history and containment measures together with several stimulatory measures suggest that the economic impact should be limited to the first half of 2020 with a rebound in the second half of 2020 a likely scenario. For the bears, it is worth mentioning that a full-blown recession normally results in a drawdown in the S&P of 30% which would imply still big equity downside from here.

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