Tactical Asset Allocation Committee Monthly Commentary
Investor anxiety morphed into panic in February. Financial markets were rattled by the latest headlines around the novel coronavirus, with investors attempting to gauge the severity of the widening epidemic and the implications for global growth. While the outbreak has slowly been abating in China and businesses have gradually resumed operations, news that the deadly virus has spread outside of China (to Korea, Japan, Iran and Italy) has stoked fears of a wider pandemic and a more pronounced global economic slowdown. Risk appetite dwindled in response, with the gloomy mood manifesting itself and sending shockwaves through the global marketplace.
After breaching all-time highs, global equity markets abruptly reversed course and entered full-blown correction-mode in February. The MSCI All Country World tumbled lower, while the S&P 500 dropped over 15% from its mid-February record high. The S&P/TSX also got caught up in the wave of selling, while MSCI’s gauge of emerging market stocks outperformed their developed market peers and fell more modestly as investors embraced pledges from Chinese policymakers to revive the economy.
Mounting fears about the global impacts of the fast-spreading coronavirus saw traders seek a refuge in government bonds and drove yields to unprecedented lows, while expectations for weaker global growth, declining inflation expectations, and increased bets for central bank easing also added to the downward move. While both the 10- and 30-year treasury yields breached new lows, the 2-year treasury yield sunk even further as investors ramped-up their wagers for Federal Reserve easing and are now pricing close to four fed fund rate cuts by year-end. In the end, the Federal Reserve validated the market’s dovish expectations and announced an emergency 50 basis point rate cut in early-March to shield the economy in the face of evolving virus-related risks.
The greenback thrived in February as investors bid-up the haven currency in what was an erratic month, underscoring the dollar’s reserve status and the US economy’s relative resilience. The dollar gained against most of its peers, with the exception of the Japanese yen that was also buoyed by haven flows. In contrast, the pound faltered after PM Johnson threatened to walk away from trade talks with the EU if its not clear a comprehensive trading agreement will be reached by June, while the Canadian dollar slid to an eight-month low alongside the severe pullback in crude prices.
Finally, the shock from the viral outbreak saw commodity prices plunge lower as the fast-spreading epidemic sparked fears about global growth prospects and accordingly, commodity demand. Oil assumed the brunt of the weakness and slipped below $45/barrel ahead of a crucial OPEC+ meeting about whether to extend the current production curbs in an effort to stabilize prices. Even gold (a traditional safe haven) wasn’t immune as investors were forced to take profits to cover their equity losses and margin calls. Interestingly, copper edged marginally higher in February as the profound policy response from Chinese policymakers saw the red metal regain some stability after the steep sell-off in 2020