Market Update from the Global CIO Office – February 2020

Candice Bangsund
Candice Bangsund
Vice President and Portfolio Manager, Global Asset Allocation

Just as one source of investor angst faded at the beginning of 2020, another intensified. After simmering trade tensions fueled a blockbuster start to the year, sentiment took a turn for the worse after the outbreak of the Wuhan coronavirus threatened to derail an already-fragile global growth backdrop. The epidemic, and efforts to contain it has forced investors to reassess the outlook for the world’s second-largest economy and by extension, global growth prospects. Importantly, Chinese policymakers responded swiftly with new measures to stem the damage to both financial markets and the economy – though uncertainty is surely to prevail in the near-term until the virus has been contained.

Equity markets were roiled by concerns that the spread of the deadly outbreak will undermine global growth prospects. Both the S&P 500 and Dow erased their year-to-date gains even after a decent start to the earnings season, while the S&P/TSX managed to buck the global trend and gained thanks to the sizeable gold exposure that acted as a hedge in what was a volatile month. Looking abroad, international developed markets dropped sharply as investors digested Wuhan-related headlines, while emerging markets assumed the brunt of the weakness, with MSCI’s gauge of developing market stocks shedding nearly 5% in January. The rising toll and rapid spread of the coronavirus saw investors seek a refuge in bonds, which drove yields back towards the panic-stricken lows witnessed last fall and spurred a sharp rise in the world’s negative-yielding debt pile. US treasuries were in high demand, with memories of recession fears that plagued the markets last summer driving investors to the safety of government bonds. Yield curves flattened substantially in January. The US 10-year treasury yield collapsed by 41 basis to 1.51%, while the 30-year treasury yield dropped below 2% for the first time since October. And at the short-end, the 2 year treasury yield fell 26 basis points to 1.31% as investors raised their wagers for central bank rate cuts – even after a steady rate decision and a reasonably bright economic assessment from the Federal Reserve.

The US dollar recorded its best month since July as the tumultuous trading environment reaffirmed the safe haven status of the greenback. Only the swiss franc, Mexican peso, and yen managed to eke out a gain versus the dollar in January. In contrast, the Canadian dollar lost some momentum and posted its worst monthly loss since December 2018, while the euro and pound also lost some notable ground.

Finally, copper prices were pummelled as fears about the economic fallout stemming from the epidemic weighed on the demand outlook, where China accounts for half of demand globally. Similarly, oil prices tumbled lower as global growth fears and travel restrictions weighed on demand prospects, which came at the inopportune time when the world is already awash with crude. Meanwhile, gold broke out to a new post-2013 high as concerns about the fast-spreading pandemic boosted demand for haven assets and bolstered expectations that the Federal Reserve will keep rates low.