The recovery rally in risk assets extended into the Friday session, as investors welcomed US Senate approval for a USD 2 trillion stimulus bill and the European Central Bank removed per-country caps on its emergency EUR 750 billion bond buying program. Japan’s Nikkei 225 gained 2.4% and South Korea’s KOSPI rose 1.8% in morning trade on Friday.
Overnight, the S&P 500 rose 6.2%, which alongside a 10.6% gain on the previous two trading sessions, cemented the biggest three-day advance in the index since 1933. The Euro Stoxx 50 closed 1.7% higher on Thursday. The rally has added to evidence that the central bank policy response is slowly succeeding in restoring market functioning, stabilizing borrowing costs, reducing volatility, and supporting liquidity.
There were signs of normalization across asset classes, from fixed income, to commodities, to foreign exchange. A fall in the US dollar suggested that a liquidity squeeze may be easing. Against the dollar, the euro rose 1.5% to 1.104, and the pound gained 2.7% to USD1.22. Credit markets rallied. The spread on USD-denominated emerging market sovereign bonds (EMBI) narrowed by around 40 basis points to 600bps, for a daily return of around 2.5%.
The cost of protection against high yield (HY) defaults—as indicated by the CDX HY index, which tracks credit default swaps on North American HY companies—diminished, with the index gaining around 3 points. Gold rallied 0.7%, and is now up near 11% over the past week, suggesting that selling pressure to meet other liquidity needs is fading.
As of end-Thursday, the latest moves bring the S&P 500, Euro Stoxx 50, and MSCI Emerging Markets indexes 17.6%, 19.4%, and 10.3% off their lows. But global stocks are still down 26.4% from their peak in February. Markets are now close to pricing the central scenario we laid out in last week’s UBS House
Our central scenario sees new COVID-19 infection rates in Europe and the US peaking around mid-April and the most severe restrictions start to be lifted from mid-May. We expect coordinated fiscal and monetary stimulus—of the sort we are now seeing Market update Nikkei 225 +2.4%, with Japanese shares outperforming in Asia trade on Friday. USDJPY –1.0%, as the yen appreciates sharply against the dollar amid month-end flows. Gold –0.3%, with the safe-haven trading near USD 1,623/oz.
What to watch: 27 March 2020
• US consumer spending for February
• US consumer sentiment for March This report has been prepared by UBS AG and UBS Switzerland AG.