Allianz Investment Management LLC February Market Update

Key points from AIM’s February 2020 market commentary

The reflation of global growth will have to wait as the world economy deals with the fallout from the coronavirus outbreak.

While many investors were expecting global growth to reflate during the first quarter on the basis of improved trade sentiment, that narrative has likely been put on hold with the developments regarding the coronavirus outbreak in China. The speed at which the virus spread led governments and corporations to take swift action to help contain the outbreak. Much of this involved reductions in travelling and transportation, which are likely going to take a toll on global growth in the first quarter.

2020 was off to a good start until the coronavirus outbreak proved to be a significant macro headwind for the first quarter

For U.S. growth, coronavirus disruptions will certainly be a headwind, but some of that weakness will be offset by stronger economic data we witnessed in January. Overall, we still expect growth for the U.S. to be within our expected range of 1.60% to 2.10%, but the uncertainty surrounding the disturbance from the viral outbreak could push U.S. GDP toward the lower end of that range.

Uncertainty encompassing the viral epidemic has driven investors to abandon riskier assets for the safety net of U.S. Treasuries, sending yields to the lowest level since last September

The risk-off trade has kept pressure on U.S. rates as the yield curve briefly inverted between the 3-month and 10-year points. Classic flight-to-quality events tend to drive investors toward longer duration U.S. Treasuries, and this recent episode was no different with the 30-year Treasury yield falling below 2% for the first time since last September. Overall, we expect yields will move back toward more normalized levels as coronavirus fears eventually fade.

The Fed has acknowledged the downside risks associated with the coronavirus, but they have signaled that they continue to be comfortable with the current levels of policy rates

Many market participants expected the last Fed meeting to be a snoozer with not much actionable change to their main policy. The Fed delivered on that narrative as forward guidance continued to portray a Fed that is comfortable with the current stance of monetary policy.  Idiosyncratic risks like the coronavirus aside, the committee’s view on the fundamental outlook for the economy hasn’t wavered. Hence, the debate among Fed officials was centered on the minutiae of its recent money market interventions.

Get the full February 2020 Market Update here

The views expressed above reflect the views of Allianz Investment Management LLC, as of 02/2020. These views may change as market or other conditions change. This report is not intended and should not be used to provide financial advice and does not address or account for an individual's circumstances. Past performance does not guarantee future results and no forecast should be considered a guarantee either. Allianz Investment Management LLC is a registered investment advisor that is a wholly owned subsidiary of Allianz Life Insurance Company of North America. Allianz Life Insurance Company of New York is also a wholly owned subsidiary of Allianz Life Insurance Company of North America.

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