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The spread of coronavirus is starting to show adverse effects on global economic growth. The increasing likelihood of a coronavirus-related pandemic led to a sharp fall in equities in the last week of February, write Guy Wagner, Chief Investment Officer at BLI - Banque de Luxembourg Investments, and his team, in their monthly analysis, ‘Highlights’.

Most major stock market indices declined by more than 10%. Over the month as a whole, the MSCI All Country World Index Net Total Return expressed in euros fell by 7.3%. The S&P 500 in the United States, the Stoxx 600 in Europe, the Topix in Japan and the MSCI Emerging Markets fell by 8.4% (in USD), 8.5% (in EUR), 10.3% (in JPY) and 5.4% (in USD) respectively.

“In terms of sectors, energy stocks were particularly impacted”, indicates Guy Wagner, Chief Investment Officer and managing director of the asset management company BLI - Banque de Luxembourg Investments. “There was also less discrimination within the markets as the traditionally more defensive sectors such as consumer staples, healthcare and utilities were not spared by the slump.“ In China, economic growth collapsed in the wake of the virus, with the manufacturing sector activity index plummeting from 50 to 35.7 in February. “Uncertainties over the spread of coronavirus are significantly reducing visibility about the global economy's growth prospects.”

Government bonds fully resume their role as safe havens

The spread of coronavirus outside China has triggered a sharp increase in investors' risk aversion, “with government bonds fully resuming their role as safe havens”, says the Luxembourgish economist. In the United States, the yield to maturity on the 10-year Treasury note plunged. In the eurozone, the 10-year government bond yield fell in Germany and in France but rose in Spain and in Italy. Guy Wagner: “Southern European government bonds were unable to benefit from the rush to non-risky assets.”

Federal reserve cuts key interest rate due to coronavirus

Because of the coronavirus, the US Federal Reserve unexpectedly cut its key interest rate by 0.5 percent to support the economic activity. In Europe, ECB President Christine Lagarde was more reserved, considering that it is still too early to consider further monetary expansion measures.

Guy Wagner
Managing Director of BLI – Banque de Luxembourg Investments
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