Global recession risks have risen but if recessionary feedback loops fail to materialise, the stimulative effect of lower yields and lower oil prices should eventually give rise to selective V-shaped recoveries. Our Stimulus Index aggregates the standardised changes in yields and oil (in local currency) to provide a gauge of financial conditions. This naturally comes with longer lags – the first chart shows that manufacturing activity tends to rebound with a 12-18 month lag following lower yields and oil prices. Similarly for the consumer, mortgage rates can take a while to follow UST yields lower. As previously noted, there are strong headwinds that prevent US consumption from rebounding sharply, mainly the surge in essential living costs (healthcare especially from now), although a sharp rise in stimulus will cushion the blow for consumers.

Looking outside the US, we expect asymmetric recoveries to develop largely in Asia, where countries are still heavily reliant on crude oil imports and benefit from a faltering US dollar. The last chart plots regional stimulus index scores vs 1y equity index returns to flag potential outperformers, eg Thailand,Turkey. We stress that these are not trades for today – the current weakness in oil demand is not due to high prices but part of wider manufacturing slowdown and expected demand fall-off due to coronavirus. However, these countries stand to recover quicker due to lower prices and expected rate cuts in the wake of Fed’s sharp easing of policy.

Source: Bloomberg, Macrobond and Variant Perception