The rout in global risk markets continued overnight. Major Asian and European equity indices are down 4-8%, and U.S. equity futures are down nearly 5% ahead of the open. Additionally, a potential pricing war between Russia and Saudi Arabia has sent oil prices plunging as much as 31%, the worst daily decline since 1991. Both countries are poised to flood the market with supply at a time when demand is waning amid the coronavirus outbreak. Treasuries are the primary beneficiaries of the global market meltdown, with long-end yields down 30-40 bps on the day (10yr yield at 0.42%). Rates markets continue to price for a significant stimulus response from global policymakers, including the Fed sending the funds rate to the zero bound in the coming weeks/months. The question now is how quickly can the virus be contained? If the virus continues to spread into Q3, a global recession is a much higher probability. If new cases peak in April/May, there’s a better chance for a strong recovery in 2H 2020, particularly for the U.S. The uncertainty with regards to both scenarios is fueling the sharp sell-off in risk markets, and backwards-looking economic data like the February jobs report doesn’t have much relevance at this point.

Jason Haley
Chief Investment Officer