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“From hope to worry”: Positive market movements still hinge on vaccine progress, says BlueBay

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BlueBay Asset Management, the London-based fixed income and emerging markets manager, is warning the recent uptick in economic activity could give way to “a more difficult backdrop” in August, as the future direction of the global economy continues to hinge heavily on developments surrounding a potential coronavirus vaccine.

BlueBay chief investment officer Mark Dowding said recent economic data showed a “more rapid bounce” during May and June than many predicted following the Covid-19 lockdown.

“We believe that in Europe this momentum may carry over into July data; conversely, in the US we believe that a dip is more likely when figures get published next month, marking some divergence in outcomes,” Dowding said in a note on Friday morning.

However, medium-to-long term US growth prospects appear more buoyant, with US tech leadership a key factor, he explained. 

“It is striking to note the performance of the Nasdaq index, up 17 per cent year-to-date, while many European bourses continue to nurse double-digit losses.”

Dowding noted the continued positive news emerging daily from Modena, Oxford University and Pfizer surrounding the potential for an effective coronavirus treatment. He said the risk of a second full lockdown appears to be receding as countries’ social distancing measures flatten the curve.

As a result, further fiscal easing measures in both the US and Europe could be on the horizon, unless the pace of infection accelerates to a point where fresh containment measures are needed.

But he also warned that even if markets continue to rally throughout July, a “more difficult backdrop” could emerge by August, if the current upward trend in US Covid-19 cases steadily increases and economic data in the US records a slide.

“In that context, it is easy to see how we may travel from hope to worry and in financial markets, greed could once again give way to fear,” he said.

As a result, BlueBay is content to run moderately long-risk bets on investment-grade credit and euro periphery names – areas which are benefitting most directly from central bank support – while remaining cautious on certain other areas.

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