With the Federal Reserve taking emergency action to stabilise the economy and calm down panicky markets, strategists suggest that longer-term investors might start to consider adding more equity risk to portfolios.
Morgan Stanley is recommending that investors sell the US dollar as financial markets have taken an economic hit from the coronavirus-induced worries.
In a Friday report seen by Bloomberg, Morgan Stanley analysts write that “the time has come to sell the US dollar”. They expect the US currency to weaken because of an “interrelation combination of aggressive [Federal Reserve] stimulus and a tactical risk rebound”.
Their advice is to buy the euro versus the US dollar with a target of 1.16 and a “fairly wide stop” at 1.08 and the Australian dollar versus the US dollar with a target of 0.68 and a stop of 0.60.
Negative investor sentiment has widened credit spreads and pulled global equities into the bear-market zone (a bear market occurs when an index falls at least 20 percent from the most recent high).
US stocks plummeted into a bear market on Thursday – with the Dow witnessing its fastest slide since the Great Depression – after President Donald Trump announced a ban on most travel from Europe but apparently failed to completely quell investors’ concerns over the handling of the coronavirus pandemic.
In looking for a safe haven, they turned to assets like US Treasury yields, leading the greenback to rise in value.
“That’s not to say we’re ‘calling the bottom’ or we’ve seen the lowest prices in risk assets,” reads the Morgan Stanley report. “But it is to say that we’ve entered the final phase of this severe, acute bear market. And that means we’re closer to the ‘early stage recovery’ phase than we were over the past three weeks. As such, our strategists around the world have begun suggesting the addition of risk.”
The paper came out before the Federal Reserve announced on Sunday that it would slash interest rates to near zero and buy at least $700 billion in government debt as part of aggressive move to cushion the blow from the coronavirus outbreak. Additionally, it plans to pump $1.5 trillion into the economy to preserve liquidity in the banking system.