DBS Macro insights – Global shutdown and policy response
The ongoing COVID-19 outbreak and a Russia-Saudi Arabia war of attrition over oil have tipped the global economy into a rapidly deepening recession. Even as infection rates fall and factories resume work in China, the recovery will be sluggish, unlike the V-shaped recovery expected by many during the early phase of the outbreak. Services make up a majority of China’s GDP; loss of activities in that area will be very difficult to recover.
Also, as the outbreak spreads worldwide, a wave of negative supply and demand shocks are percolating through the global economy.
Our risk dashboard shows rapidly rising stress across asset classes. The extent of stress is still below 2008/09, but the pace with which stocks have sold off and credit spreads have widened have been striking. This reflects how quickly sentiments have had to adjust, and the amount of lingering uncertainty about where all this is going in the near term.
Our key focus is on emerging markets and credit as an asset class. As commodity prices correct and growth outlook dims amid lockdown, bonds from energy, transportation, and tourism sectors are coming under pressure. Despite lower interest rates, a credit crunch is very much on the cards. Policy intervention (liquidity injection, income support, and tax cuts, for instance) may soften the blow, but is unlikely to backstop credit risks until economies bottom.
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