Invesco Canada blog

Insights, commentary and investing expertise

Assessing the globe’s three-pronged policy response to coronavirus

The coronavirus pandemic is spreading in Europe, the U.K., Canada, and the U.S. – and economic activity is grinding to a halt in some sectors as discretionary spending and activity have been sharply reduced in favour of basic needs. Real-time indicators of demand such as restaurant patronage, traffic, and cellphone mobility data are all down dramatically on a year-over-year basis across several major regional and local economies.
The market response has been equally sharp. Stocks rose and fell dramatically last week, especially on Thursday when the Dow experienced its largest drop since 1987 and the STOXX® Europe 600 Index experienced its largest drop ever. The bond market experienced dramatic volatility as well, with the 10-year U.S. Treasury yield falling to as low as 0.4% last week.1 Markets appear to be experiencing a lack of confidence in the policy responses in Europe and the U.S., and that seems to be continuing into this week.
One of the questions we have been receiving lately is: What is the appropriate policy response? There’s a lot embedded in that question. In the past, we have written about the importance of a three-pronged policy response to coronavirus: 1) public health policy to contain the virus, 2) monetary measures to ensure financial liquidity and functionality, and 3) fiscal support to contain the real economic damage. Combating the crisis from these three angles remains critical today — here’s how we assess progress in these areas across the globe.


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The coronavirus impact on fixed income markets

Chief Strategist and Head of Multi-Sector, Invesco Fixed Income
March 16, 2020

Subject | Coronavirus impact | ETFs | Industry views

Macro impact
The spread of the coronavirus globally has continued unabated in recent weeks. The combination of “business as usual” in Europe and the U.S. and limited testing has exacerbated the issue and increased uncertainty regarding the extent of the outbreak and the ultimate path the outbreak will take. As policymakers take more aggressive measures to control the spread of the virus, we will likely see a large impact on global growth. As the extent of the outbreak has expanded, investors have had to price in a larger impact on growth over a longer period.
Invesco Fixed Income expects Q1 growth in the U.S. and Europe to be weaker than expected and Q2 growth to be significantly negative, as these economies are hit by fear and the impact of measures implemented to contain the virus. The path forward also remains very uncertain, which is a headwind for markets.
China provides a model for us to think about what lies ahead. China implemented strong measures to control the virus, which has hit the economy badly in Q1. China has now controlled the outbreak and is in the process of returning to work. Once the level of daily infection peaked, the process of returning to work started. Infections in the U.S. and Europe are still rising, and it is likely the epidemic will take a while to peak in these regions. It is the impact on growth and uncertainty around the virus propagation that is causing current market action.
It is very important to acknowledge that we believe this is a fundamentals-driven correction, which makes it very different than a financial crisis. The resolution of this situation will likely take time as we watch the epidemic play out in the U.S. and Europe. Financial conditions-driven crises, such as the one in Q4 2018 and the Global Financial Crisis can be resolved quickly by central banks. In the case of fundamentals-driven crises, central banks can only ameliorate, not solve, them. We expect this market to follow a U pattern rather than a V.
We expect risk assets to continue to be volatile, and markets will likely take a while to bottom. U.S. interest rates have been the shock absorber, but there is little room for bonds to rally further, in our view, as we do not expect the U.S. Federal Reserve (Fed) to embrace negative interest rates. The Fed will likely cut rates close to zero, but we expect the yield curve to remain positively sloped. Lower U.S. interest rates will likely erode the interest rate advantage of the dollar versus other developed market currencies, which will likely weigh on the dollar going forward versus other developed market currencies.


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What could short-term volatility mean for long-term investors?

Senior Equity Product Strategist
March 14, 2020

Subject | ETFs | Macro views

Markets are continuing to be highly volatile – and the past two weeks have seen historic gains and losses. While I prefer to evaluate performance over longer periods, it’s understandable that investors are especially interested in the market’s daily fluctuations. Here’s what I’ll be watching in the coming week and months.


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What to make of stocks entering bear-market territory

Global Market Strategist, North America
March 12, 2020

Subject | Coronavirus impact | Macro views

Investors with a 50-year investment horizon will live through, if history is any guide, 14 bear markets over the course of their investing lives.1 That’s a bear market once every 3.57 years.2 History would also suggest that during those bear markets, investors should expect their equity portfolio to lose, on average, 32% (median 28.8%).3 It’s almost enough to make investors wonder why they put money in equities at all. Yet, stocks, as represented by the S&P 500 Index, returned, on average, 10.5% per year over the past 50 years.4 That’s a doubling of their investments, on average, every 6.9 years, notwithstanding all the bear markets.5


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