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25th February Market Commentary

By Henry Adams on 2020-02-25

The week has started in risk off mode. Equity markets across the world have sold off heavily on the greater geographical dispersion and scale of those infected by Covid-19.

The sell-off thus far just this week has been violent enough not just to see some rather eye-watering hits of 3-5% in various indices, to cumulatively put most markets in the red year to date. The potential contagion in markets is real, and, much like the virus, is proving hard to contain. More on this here from a previous blog. Since posting, sadly, many of the hypotheses have already been proven to be correct. Away from this, it was a little unsettling to see the latest results and analysis from Monzo. The cash burn, large fundraising rounds and hires in the hundreds is nothing new. However, for their initial foray into lending to be, frankly, as spectacular a failure as it was, makes one wonder if there is anything behind the coral-coloured curtains (particularly given the current backdrop...what happens when things get ugly?!). To have lent £13,200,000 and for £3,100,000 to be deemed distressed demonstrates a complete lack of understanding of credit.

The supply that has been awaited in UK Treasury Bills has arrived to the cheer of those looking for a safe haven in these increasingly uncertain times. The quadrupling of issuance in the 1 month bill saw a welcome cheapening to the issue. This week sees further supply coming, also longer out the curve in three and six month paper, and whether by design or to plug a shortfall in issuance to date, it appears to be timed perfectly. The change in Chancellor has been welcomed by markets. Whilst it is seen as Number 10 taking power from next door and thus an easier time for the government to pass policies involving fiscal stimulus, investors appear to have faith in the ability for rising debt levels to be serviced by the increase in broader activity.

Along with the sell-off in risk assets and the buying of safe haven government debt, the yield curve has understandably shifted with this expectation of a slowdown in global growth. The US has not been immune to this. As of this morning there is now 75 basis points of cuts being expected by the end of 2020. Quite a shift from just a few weeks ago with the view of no change and a wait-and-see approach from the FED being both prudent and believable. Three month bills and shorter can still be picked up in the 1.50s after which inversion is once again the theme. Were one to believe the hype, locking in 1.30 (or giving up 20 basis points in the near term) seems to be an inexpensive option if you believe action will have to be taken.

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