The COVID-19 pandemic has raised the prospect of the sharpest global economic contraction in decades. Accordingly, risky assets such as equities have plummeted, with many benchmark indices shedding over a third of their value over the past month. However, the sell-off was remarkably broad-based. Traditional ‘safe haven’ assets, which ought to outperform as investors seek more reliability and less risk in turbulent times, have also suffered. Despite US rate cuts, the yen has depreciated with the exception of a short-lived surge in early March. Government yields outside of the US have risen, for instance in Germany and Japan, while gold prices have tumbled. This suggests that investors are scrambling for cash, selling relatively liquid assets even at a discount. Indeed, Fathom’s monthly liquidity indicator, FLiq, recorded a drop of around 1 standard deviation in February. The March reading is expected to be worse. The big risk to markets could materialise if this liquidity crunch ripples through corporate debt markets.
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