How far can this relief rally go?

For one week we do see a relief rally in equities and to a lesser extent in bonds. The S&P 500 trades at its resistance level. But even if we break through the 2’650 level, we most likely will retest the lows from last week.

Fig. 1: The S&P 500 at its resistance area

Short-term we might sell the rallies but mid-term it looks like one should buy the dips. The German council of economic experts expects a V-shape recovery in H2 based on the latest interpretation of the effectiveness of the lockdown.

Fig. 2: Italy shows signs of a slowdown of new infected people

Germany’s government plans have three scenarios. The base case is a lockdown of 5 weeks and a period of 3 weeks to restart, followed by a V-shape recovery in H2. The 2^nd scenario talks of 7 weeks lockdown, 5 weeks restart but still a V-shape recovery in H2 2020. In the third scenario the lockdown takes much longer, and we see a U-shaped recovery.

In all cases Q2 GDP will be significantly negative. But if we were to see a V-shape recovery the impact on equity prices will be substantial. All fiscal measures have risen the likelihood that once we loosen the lockdown this massive liquidity could push markets into the next bubble.

Fig. 3: South Korea seems to have passed the peak without lockdown

Fig. 4: The selloff in Gold was stopped at its 200-day average

Mid-term we expect gold to profit from the risk-off mode and from the need to invest money which is at moment parked in cash-products.

Fig. 5:  Cash is king, but for how long?

Fig. 6: New issues are back, at least in the investment grade (IG) space

To sum up, all depends on the development of new infected people. But it seems in Italy the severe measures seem finally to work. The outlook for the US is unfortunately less positive, given the way they have dealt with the situation.

Fig.7: New infections: the worst in the US is still to come

From a statistical standpoint China and South Korea have a very low cases for 1M population ratio, while Italy and Spain have the worst ratio.

It looks like the bond and equity markets have priced in a recovery in H2. Based on the actual situation this looks reasonable, but as we have seen in China the risk of a 2^nd breakout of the virus is high and therefore todays assessments must be taken with a grain of salt.

Published: 31/03/20 by Blackfort CIO Dr. Andreas Bickel

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