Market News Published-21/08/2020

After the sharp reassessment of growth prospects and the deterioration of risk sentiment in February and March, global financial markets have been recovering since April on the back of an unprecedented easing of global monetary policy and sizable fiscal support, as well as hopes for a strong economic recovery based on a quick reopening of economic activities. The US Fed slashed interest rates aggressively, sharply expanded its balance sheet through asset purchases, and set up several facilities to lend to struggling entities across the economy. As a result, global equity markets have rebounded strongly from their March lows with some indices, particularly in the US, now approaching or surpassing pre-crisis levels, decoupling from a much more gradual recovery in the real economy.

At the same time, US bond markets have recovered, as well. In the US, the 10-year Treasury yield has moved sideways over the past few months, while spreads on corporate bonds have compressed as abundant market liquidity has led to a surge in corporate debt from already high levels. The huge boost to liquidity provision in the advanced economies has spilled over to emerging markets despite the risk posed by still rising infection rates in a number of countries. Lower global interest rates have also provided space for additional rate cuts by emerging market central banks.

As a result foreign investors have gradually returned to emerging markets in search of yield, lifting equity prices and compressing long-term yields and corporate spreads. As sentiment improved, the US dollar has weakened, particularly against emerging markets currencies. Investor sentiment has improved significantly in the EU as well; first in response to monetary easing and bold fiscal policy actions, then following reports that the pandemic had peaked and that Member States were ending their confinement periods, and most recently in the light of some encouraging macroeconomic data.