Coronavirus - Market Update (May 24th)
A few weeks ago, I stated that, after the initial, strong rebound from the March lows, global financial markets entered a ‘wait and see’ mode where investors are looking to observe how the economy will restart following the relaxation of the Coronavirus lockdowns and assess what the medium to long term implications may be. As previously explained, financial markets have already discounted the severe economic impact of the worldwide Coronavirus lockdowns, but also that restrictions are now gradually being eased as the virus situation is stabilizing/improving in many countries. This is still very much the case. The level of the benchmark S&P 500 US equity index is not far from where it was at the end of April. During this time, extensive monetary support by global central banks, particularly the US Fed (markets have even started to price in negative rates in the US – see chart below of the evolvement of pricing of Fed Funds Rate future contracts), is driving an improvement in market conditions (liquidity, etc.), which continues to provide a fairly positive backdrop to markets.
On the Coronavirus front, it is encouraging to see that although economic demand is constrained by what is still only a partial relaxation of lockdowns and the fact that certain sectors are still closed or nearly closed, in countries where the health situation is generally good (and economic situation is reasonable), consumer sentiment seems to be returning to normal perhaps faster than some people had expected. Aside for anecdotal evidence, this is also reflected is some surveys: for example, The ZEW Indicator of Economic Sentiment for Germany climbed 22.8 points from the previous month to 51.0 in May 2020, the highest reading since April 2015 and well above market expectations of 32.0. Investors grew optimistic about a possible economic turnaround from summer onwards and saw activity growth to pick up pace again in the fourth quarter of 2020, although the catching-up process will take a long time (by the way, at the same time, the assessment of current economic situation continues to be bad).
Germany ZEW Economic Sentiment Indicator
Another positive development is that despite widespread fears that following a relaxation of the lockdowns we could see new Coronavirus infections spike again, this does not seem to be happening yet. In fact, the majority of countries had decreased infections rates after national lockdowns were lifted (see JP Morgan chart below). This could suggest that the pandemic could have its own dynamic that is not necessarily related to lockdown measures that are being implemented or eased. This data supports further reopening of the economy.
Daily Infection Rate Post-Lockdown vs. Daily Infection Rate During National Lockdown