Market turmoil over virus has only started
“The speed of the market repricing has obviously been dramatic. However, markets have only gone from pricing in no risk of anything to a moderate risk,” Riddell said. “Where we think markets can still move is in volatility.”
Riddell’s Strategic Bond Fund, which he manages with Kacper Brzezniak, outperformed 98percent of its peers in the past month, when markets grappled with record-low bond yields, a plunge in stock markets, spiking currency market volatility and surprise rate cuts from central banks, including an emergency cut by the US Fed.
The London-based Allianz manager has been bracing for a wobble in markets for a few months and thinks the recent repricing is still too mild. He is using options to bet on more currency swings and also has positioned for short-term US yields to lead declines as he sees a significant chance the Fed could slash interest rates close to zero.
“If global data really tanks in the coming weeks and months, investors will realise that central banks can't cure coronaviruses and markets such as currencies and corporate bonds are still ripe for a correction,” Riddell said.
The virus has spread from China to dozens of countries, with cases surging above 96000 and the death toll exceeding 3300. Governments in Asia and Europe have pledged more than $50bn in budget measures, and the US House of Representatives approved a $7.8bn emergency spending bill.
Fears of the infection and imposed quarantines have severely hit economic sentiment and activity. The Paris-based Organisation for Economic Co-operation and Development slashed its global outlook by 0.5percent and warned that the virus was pushing the world economy closer to a contraction.
Central bankers are looking to dig deeper into their policy toolkit as they attempt to cushion any economic blow. Investors have been more aggressive with their expectations for monetary stimulus after the Fed’s surprise 50 basis-point cut on March 3.
One-year implied volatility in euro-dollar, which climbed at the end of February to the highest since mid-2019, has since retreated to its average level for the past year of about 6percent. Riddell said positioning for increased currency swings via options was incredibly cheap in January.
Although he has trimmed some of these bets, with his view that the euro-zone economy is already in a recession, he expects currency volatility to be “twice as high” if the situation worsens.
Despite US and UK bond yields at near-record lows, Riddell doesn't see this as a floor.
“Even if we aren't hysterical about the health impact of the virus, it doesn't mean the market and economic impact is going to be muted,” he said.