Summary

  • Historic coordinated global central bank easing and fiscal stimulus boosted equity markets and stabilized credit markets in the second quarter. See Exhibit 1. Upside surprises in business survey data and domestic employment in June fueled optimism around a faster economic recovery especially in China and the US.
  • Future fiscal stimulus from Congress and the united policyresponse in the EU have calmed fears about future economic damage in developed markets. The likelihood of tail risk scenarios has abated. 2H 2020 global growth will accelerate sharply, although many economies will not reach 2019 output levels until the end of 2021.
  • Equity valuations, especially in the US, are pricing in a V-shaped recovery in earnings in 2021. We expect global equities to be supported by the lack of investment opportunities in a zero interest rate environment. Further upside in equity markets will be driven by cyclical sectors (industrials, financials and energy).
  • The Fed has announced short-term rates will be 0% for the foreseeable future. This constrains monetary policy but enhancesthe effectiveness of fiscal policy at a low cost. Global central bank asset purchase programs stabilized credit markets and kept yields low amidst record issuance. Credit spreads declined in the second quarter but continue to reflect cash flow uncertainty and an increase in
    defaults.
  • 2H 2020 presents risks associated with the election, renewed US- China tensions,a second wave of COVID-19 cases, Brexit negotiations and policy decisions.

Continue Reading