As the coronavirus spread peaks, persistence and penetration are at this point uncertain.
For the time being, we believe it will remain a temporary, albeit profound and impactful, shock to the Chinese economy, with spillovers to trade partners in Asia and temporary disruption to the supply chain.
The Chinese authorities have already proved themselves capable in preserving social stability and protecting economic stability, so we could see a V-shaped recovery in Q2.
The shock transmission will take place through a downturn in global trade and confidence.
Being able to measure the impact, given the lack of available data, is premature, but Europe and Asia will be the most affected regions.
In fact, the fragility of their economic stance, the vulnerability to their supply chains and their open nature leave these areas more exposed to the deterioration of Chinese economic conditions.
Conversely, the US, thanks to the resilience of its internal demand, will maintain its growth path.
Markets are confident monetary policy will be capable of fixing the forthcoming slack; central banks became accommodative almost everywhere globally, although their space for manoeuvre is limited and will curb the reaction function.
Year-to-date risk assets show a complacent dynamic, pricing in a temporary shock and a V-shape recovery out of China, and therefore are aligned with our base scenario.
Vice versa gold, US dollars and Treasuries displayed their safe haven nature. US 10-year yield is now back to its triple bottom of 2012, 2016 and 2019.
We do not expect it to break down, nor the yield curve to inverse, sending recessive fears.
Our asset allocation remains moderately defensive: slightly positive equity positions favouring markets more exposed to cyclical recovery and looking for better entry points to get bolder exposure to emerging markets and European equities.
We maintain yield enhancing strategies by overweighting EM and keep exposure in peripherals and selectively in credit, flat on high yield.
We have a barbell strategy for exposure to risk assets, being long US duration position, gold and linkers.
Monica Defend is global head of research at Amundi Asset Management
• Central banks maintaining easy financial conditions
• Budgetary policy triggering economic momentum and prolonging the cycle
• Persistence of the impact of coronavirus
• Corporate earnings slack