Throughout the coronavirus crisis, Funds Europe presents some of the best market commentary from fund professionals. Today, Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson Investors, looks at market reactions as the Fed tries to manage the crisis.
Having unveiled a sizable package of support only a week ago, the Federal Reserve was back throwing unlimited amounts of quantitative easing at unruly markets. Having bought a significant proportion on Friday of the $200 billion it allotted to mortgage-backed securities only a week ago, the initial firepower was clearly being used up far too quickly for the Fed’s liking.
Moving to open-ended purchases sends a powerful signal to markets that the Fed will not let markets run out of control as it fights to stabilise the US economy. However, this felt like it could be the final policy move from a central bank that now has few cards left to play by itself.
The move into credit markets was perhaps the most attention-grabbing part of the announcement. Previously kept out by the inability to take on credit losses, the US Treasury provided loss absorbing equity to allow the Fed to enter what had become one of the most dysfunctional markets – US dollar investment grade credit. Opening up purchases to both new issuance and existing bonds, the Fed also lumped corporate bond ETFs into the mix.
The initial reaction was marked as European-listed ETFs surged towards a double-digit gain, before halving those returns later in the afternoon. Similarly, the sudden jump in equity markets was extinguished fairly quickly as markets realised that the Fed was acting alone. It seems risk assets still await the US fiscal mega-deal before they are prepared to rally, outside of a significant improvement in the viral outbreak situation.
While politicians continue to wrangle over the details, markets will fret about the damage being done to companies with every moment that passes.
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