Throughout the coronavirus crisis, Funds Europe presents some of the best market commentary from fund professionals. Today, BMO Global Asset Management’s multi-asset experts provide a global update and comment on oil, economic recovery and monetary policy.
Steven Bell, Chief Economist, Multi-Asset Emea
The virus continues to spread rapidly – indeed exponentially. Economists are still way behind in recognising the scale of the recession that lies before us. The extent of the decline in corporate profits will be similarly dramatic. Governments all over the world are implementing drastic measures to contain the spread of the virus.
With regards to policy, on the monetary side, the interest rate cuts by the US and other central banks are of limited value but their other actions have been critical in calming markets. Fiscal action is what ordinary people need and there has been big bold policies proposed by the US, with the UK and many others planning similar policies, but these will merely serve to cushion the blow, to reduce not avert recession.
If the US and Europe follow the pattern of recovery of China, there is optimism that the next three months will be the worst for the economy. The speed of the downturn has been increased by technical factors that have nearly run their course, and so we see scope for a bounce. In addition, many investors will need to buy a lot of equities in order to rebalance their portfolios from the fall in equity markets. I don’t think we have hit market lows, but we are not far from them.
Fred Demers, Director, Multi-Asset Canada
Oil is suffering from Covid-19 induced destruction and also the price war. This year, the world was already in excess supply of oil, then hugely exacerbated by the collapse of China’s demand for oil as it began shutting down in late January. China’s oil demand accounts for 20% of global demand. Oil is hard to store, which is why we have seen price falls of 15% in both January and February. OPEC+ negotiations fell apart as Russia and Saudi Arabia stepped away and flooded the market with supply. Oil is currently down nearly 50% month-to-date; although current price levels can only be temporary as production is not profitable, Russia and Saudi Arabia have the scope to absorb these levels for several months, weak oil prices could persist longer than the COVID-19 crisis. Canada is likely to be the first oil casualty – with its crude oil prices at $7.5 per barrel last week. Unsurprisingly, energy companies are down around 50-60% year-to-date in both the US and Canada. For Asia and China in particular, cheap oil will provide a tailwind as their economies recover.
Currencies already reflect much of the bad news, and so there is scope for the oil price to weaken further from here, hitting the Canadian dollar particularly hard. Demand for USD remains high as investors scramble for US liquidity in times of acute stress. We are more constructive on sterling given its steep fall in the past ten days.
Jon Adams, Managing Director, Multi-Asset US
There have been some hefty negative forecasts for US GDP contraction for Q2, JPMorgan’s -14% looks bullish compared to Goldman’s -24%. A spike of jobless claims is expected, could be as many as 2 million. The Fed has announced big stimulus measures and we think they are likely to step up purchases from here. The Fed today has effectively backstopped local governments, with more announcements to come over the weekend. US government will prepare a third tranche of fiscal stimulus, Senate should pass it early next week then it will move to the House. We expect $1.5 trillion to be announced, which is over 7% of GDP and much larger than in 2009 ($831 million). Overall, US is moving towards maximum stimulus and the Fed has acted very aggressively.
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