Markets are tied to infection data again

Confidence in the economic recovery has been called into question by investors. US markets on Wednesday lost more than 2.6%, and Hong Kong indices are falling. However, there are several notable exceptions.

The Shanghai Stock Exchange 50 blue-chip index is up 0.5%, rising to highs since March. Japanese Nikkei225 inside the day turned to growth. The strong positions of Asian exchanges fit into a more prosperous epidemiological picture of the region.

Earlier this week, the IMF made economic forecasts for the end of the year, now expecting global GDP to decline by 4.9% in 2020 (-3.0% in April forecasts). The estimates for France, Spain and India underwent the most significant downward revision: worsened by more than five percentage points. For comparison, expectations for China were reduced by 0.2 points to an increase of 1% in 2020, and recovery growth by 8.2% in 2021.

A Spanish flu pandemic a little over 100 years ago taught us that those regions that adhered to the most stringent quarantine measures came out of the pandemic regime faster and with less damage. The example of China reaffirmed this hypothesis. Decisive actions and quarantine for districts and regions, as well as mass testing, help to avoid national lockdowns.

Earlier in March, large-scale injections of liquidity from the US Central Bank returned markets to growth. However, they failed to satisfy the hunger for cash for companies completely. Now they have historically high activity, placing stocks and bonds in record volumes, undermining the stocks and bonds price growth.

Central bank’s liquidity injections are like a “fire extinguisher”, useful in the short term, but not able to revive the growth for an extended period. We must not forget about the example of Japan, where massive QE for many years was not able to restore either the economy or the markets.

This directly affects the dynamics of stocks. American markets were under pressure on reports of a record increase in COVID-19 cases overnight.

The head of the Fed, Powell, was right when he said that the epidemiological situation is more critical for the economy than the actions of the government and the central bank.

Officials in the US and European countries are in no hurry to return the national lockdowns, but people’s behaviour may well return to a crisis regime. For markets, this may be the second wave of decline, which may turn out to be more protracted and deeper. It is important to understand that this is not even the second wave of circulation, but only the first, and as yet unfinished.

The FxPro Analyst Team