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Services activities, which represent the major component of the GDP of developed economies, are virtually at a standstill, inevitably leading to a deep recession. Due to uncertainty over how long the health crisis will last, it is difficult to estimate the extent of the economic collapse, write Guy Wagner, Chief Investment Officer at BLI - Banque de Luxembourg Investments, and his team, in their monthly analysis, ‘Highlights’.

In March, the IHS Markit Services PMI (Purchasing Managers Index) plummeted in all regions, falling to 39 in the United States, 28 in the eurozone and 33 in Japan. The manufacturing sector, which is traditionally more cyclical than services, recorded a slightly weaker fall-off, but this could worsen in the coming months. In China, following the plunge in February, cyclical activity stabilised in March as the containment measures were partially lifted.

“The global recession could be of unprecedented proportions”

 “Due to uncertainty over how long the health crisis will last, it is difficult to estimate the extent of the economic collapse”, says Guy Wagner, Chief Investment Officer and managing director of the asset management company BLI - Banque de Luxembourg Investments. “If containment measures remain in place for most of the second quarter, the global recession could be of unprecedented proportions.”

Most central banks announce significant monetary easing measures

Most central banks have announced significant monetary easing measures due to the economic shock triggered by the health crisis. In the United States, the Federal Reserve cut its benchmark interest rate by 1% in a single move, taking the federal funds rate to a range of 0% to 0.25%. In addition, a new quantitative easing programme aimed at the unlimited purchase of government bonds and mortgage securities will be implemented. In Europe, the ECB also announced an additional 750 billion euro asset purchase programme for government and corporate bonds.

US government bond yields decline, government bond yields in the eurozone do not fall

The economic collapse caused by the COVID-19 pandemic led to a further decline in US government bond yields. In the eurozone, government bond yields did not fall despite the difficult economic situation. “In the financially stronger countries, the rise in yields can be explained by investors having to sell their most liquid profitable positions to meet their liquidity needs”, indicates the Luxembourgish economist. “In the financially weaker countries, the rise in yields reflects investor concerns about the repayment capacity of governments that were already heavily indebted before the health crisis.” During the month, the 10-year government bond yield rose in Germany, in France, in Spain, and in Italy.

Historic correction on the equity markets

Prospects of a significant deterioration in corporate earnings resulting from the containment measures led to a historic correction on the equity markets, which have recorded one of the worst quarters in stock market history. Over the first three months of the year, the MSCI All Country World Index Net Total Return expressed in euros fell by 19.6%. The S&P 500 in the United States, the Stoxx 600 in Europe, the Topix in Japan and the MSCI Emerging Markets fell by 20.0% (in USD), 23.0% (in EUR), 18.5% (in JPY) and 23.9% (in USD) respectively. In terms of sectors, healthcare, technology and consumer staples were the most resilient sectors, while energy, finance and commodities saw the biggest falls.

Guy Wagner, Managing Director

An economics graduate from the Université Libre de Bruxelles, Guy joined Banque de Luxembourg in 1986 where he was head of the Financial Analysis and Asset Management departments. He was appointed Managing Director of BLI – Banque de Luxembourg Investments in 2005.

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