However, that assumption was rapidly abandoned when it became clear that significant outbreaks had occurred in Italy, Iran and Korea, and that the virus was now spreading globally. What also became clear was that near term economic growth and corporate profit forecasts would not be met and were likely to see drastic downward revisions. As this dawned on investors over the last few days of the month, risk assets sold off aggressively and safe haven government bonds rose sharply.
Over the month, economic data releases (which are mainly backward looking) were largely either in-line with, or better than expected. However, towards the end of the month some forward looking data began to deteriorate and a number of corporates warned of worries regarding supply chains and falling demand.
Looking for positives, we also saw a number of policy responses from the authorities. The Federal Reserve (Fed) grabbed the headlines when it announced a surprise 0.5% cut in the Fed Funds rate, which was followed up by a number of other central banks. It was also apparent that many governments were looking at fiscal initiatives to ease economic pressures, with China, Hong Kong South Korea and Italy all in the vanguard.
Increased risk aversion and a reappraisal of the outlook for interest rates saw bond yields move sharply lower. Safe haven government bonds were particularly strong, while credit spread widening meant corporate and emerging market bond markets could not keep up with high quality sovereign bonds. Over the month, the JP Morgan Global Government Bond Index managed +1.7%, the ICE Merrill Lynch Global Corporate Investment Grade Bond Index delivered +0.7%, the ICE Merrill Lynch Global High Yield Bond Index lost -1.5%, and the JP Morgan Global Emerging Market Bond Index declined -0.9% (all hedged to sterling).
Equity returns were very disappointing, with the late month weakness causing the MSCI AC World Index to a decline -4.9% in sterling terms. Asia ex Japan (+0.4%) and the Emerging Markets (-2.0%) were the most resilient regions, while the UK (-8.9%) and Japan (-6.0%) were weaker. Although selling pressure seemed to be fairly indiscriminate, defensives marginally outperformed cyclicals. The most resilient sector was Communications Services (-2.5%) followed by Real Estate (-3.3%), while Energy (-10.7%) and Materials (-6.7%) were the weakest.
Finally, in foreign exchange markets, the Japanese yen and US dollar were among the strongest currencies, while the pound was relatively weak, falling -2.9% against the US dollar, -3.2% versus the yen and -2.4% relative to the euro. Emerging Market currencies were also under pressure, with the South African rand (-5.1% versus the US dollar), the Mexican peso (-4.7%) and the Brazilian real (-4.8%) among the more significant fallers.
Note: All monthly data is quoted in Sterling terms unless otherwise stated.
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