When The View Is Getting Blurry, Stick To Main Convictions

Market reaction: The further spreading of the coronavirus, especially in Europe, has, in the past few days, triggered a selloff in risk assets and high demand for safe assets (US dollar, Treasuries and gold). As markets reassess the spillover effects of the virus into the economy, volatility is likely to persist.

Adjusting the economic outlook: The coronavirus is adding risk to an existing weak trend for global trade growth with fear that some stagflationary forces might result from this crisis (more de-globalisation / weaker growth). In this environment, our central scenario has darkened, with lower GDP growth expectations in H1. The shock could possibly prove stronger in the short term, but we stick with the view that the situation will stabilise at some point in the coming months, leading to a catch-up thereafter, with no long-lasting shock to potential growth.

Additional support from central banks and governments to fight any further deterioration in the economic outlook is a key assumption regarding this view. The US appears more insulated and supported by resilient internal demand, while emerging markets and Europe should be the most affected over the short term.

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