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Faith in the Fed to Get Fresh Test as Markets Shudder at Virus

Justin Carrigan

(Bloomberg) -- Investor faith in the largess of central banks is about to be tested anew as the soaring rate of Covid-19 infections re-establishes itself as the chief obsession of markets.

Confirmed coronavirus cases surpassed 10 million at the weekend, continuing an accelerating trend that’s decimating economies around the world. The S&P 500 Index dropped 2.4% on Friday as the rising numbers prompted some American states to curtail reopening plans. The yield on the benchmark 10-year Treasury note slipped to the lowest level since May 14 and the Bloomberg Dollar Index rounded off a third week of gains as investors sought havens.

The renewed risk-off tone is likely to dominate when trading starts in Asia on Monday, according to analysts, though a report Sunday showing the first increase in profits at Chinese industrial enterprises since November may provide some support to stocks.

“Investors’ recent love of U.S. risky assets will soon reverse as the U.S. will battle the resurging pandemic,” Erik Nielsen, the London-based chief economist at UniCredit SpA, wrote in a note Sunday. “Stating the obvious: don’t fight the major central banks. They’ll remain in the game for years to come.”

Israel’s TA-35 index led declines in Middle East markets Sunday, sliding as much as 2.9%. Stocks in Bahrain, Qatar, Jordan and Egypt also retreated.

The following is a round-up of comments looking ahead to a week in markets:

Erik Nielsen, chief economist at UniCredit in London:

“Markets have been struggling to see through the fog these past months, but greater clarity is now emerging and that leaves a picture of several mispriced asset classes. I expect many of these will be somewhat corrected during the second half of the year.There will be “some moderation of recent months’ ultimate safe-haven status for the dollar; i.e. a prospect of a gradually weaker dollar.“I also worry about emerging market assets. Emerging-market equities have held up relatively well, but this does not square with the dreadful numbers now emerging for their infection and death rates from the pandemic in a deglobalizing world that will struggle to get back to potential, hence limiting the upside for commodities.“With a more convincing growth trajectory, big positive policy reforms under way and some seriously under-valued asset classes, Europe is likely to be a key recipient of the allocation away from the U.S. and EM.

Bank of America Securities analysts Ioannis Angelakis, Barnaby Martin and Elyas Galou:

“The central bank-driven euphoria seems to be in consolidation mode” as inflows into high-grade and government bonds slow amid the risk of a second wave.“Only two weeks ago, investors across Europe were adding risk at an unprecedented rate. However, the last two weeks saw a marked slowdown of inflows across credit and the EM debt space.”

Iyad Abu Hweij, the managing partner at Allied Investment Partners PJSC in Dubai:

“Global equities performed negatively during the week as investors were concerned about resurgence in Covid-19 cases. The rise in new cases could possibly lead to another lockdown in certain parts of the U.S. and around the world, which will delay the recovery process.”“Going forward, investors will reassess their portfolios to reduce the overall risk amid the rising uncertainties post the resurgence in Covid-19 cases. “Moreover, equity markets might witness increased volatility in the coming weeks as odds of downside risk are rising post the sharp rebound in equities since mid-March.”

Nader Naeimi, head of dynamic markets at AMP Capital in Sydney:

“While emerging market equities have posted strong gains from their late March lows, they have continued to underperform developed-world equities.“With inventory levels at historical lows, business expectations rebounding and new orders picking up, 2H 2020 is likely to be the start of a multi-month upswing in the manufacturing cycle. This will provide a significant tailwind for EM markets.“The combination of a falling U.S. dollar together with ultra-easy monetary policy will super charge EM equities relative performance in the second half.“I am expecting a much stronger absolute and relative performance by EM from here” for currencies and stocks.

Jens Nystedt, a New York-based senior portfolio manager at Emso Asset Management:

“We see the best opportunities in emerging-market fixed-income assets that have recovered the least so far and have not yet priced in a reset higher in global economic activity. There are still EM oil exporters that faced a dual shock of the Covid-19 crisis combined with an oil price war that are still screening cheap. In addition, better global growth, likely led by non-U.S. large economies, would be a headwind to the dollar and allow beaten up EM currencies to also stabilize and eventually recover.“Emerging-market debt, by and large, can sustain the rebound given the unprecedented fiscal and monetary policy actions by the major economies, barring a second wave larger than the first one for Covid-19. Given the unprecedented backstop for high-grade and high-yield fixed-income markets in the U.S. and Eurozone, investors looking for yield remain interested in picking winners versus losers. Large real interest-rate differentials will allow EM to attract portfolio inflows among the better quality names.“At the end of this crisis, debt burdens will weigh on the growth potential for many economies and the recovery in growth risks taking longer than what the market current anticipates. It is hard for the market to differentiate between a V-shaped reset in growth and a follow on very sluggish recovery.”

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