- While the virus-induced slide into global recession was rapid, the resumption of economic activity will be anything but
- Markets have seized on signs that infection rates are slowing, but actual economic recovery remains a distant prospect
Has the Covid-19 meltdown turned into the coronavirus rally? Anyone keeping an eye on the number of confirmed cases and fatalities tracked by Johns Hopkins University " total infections worldwide have soared from less than 200,000 in mid-March to 1.5 million, while the death toll has surged from under 10,000 to almost 90,000 " would be right to question why investor sentiment has improved so strongly over the past fortnight.
Having plummeted 34 per cent between February 19 and March 23, the benchmark S&P 500 equity index has since risen almost 23 per cent, thrusting the gauge into a bull market.
In corporate bond markets " the most vulnerable part of the financial system due to mounting concerns about the impact that lockdowns and social distancing measures are having on companies' earnings and ability to service their debts " investors are once again piling into the high-yield market.
According to the Financial Times, junk bond funds attracted US$7 billion in inflows in the week ending April 1, the biggest weekly sum on record.
In a note published last Friday, JPMorgan argued that "enough has changed fundamentally and technically (for investors) to justify adding risk selectively".
Two factors account for the sudden improvement in sentiment. First, the extraordinary monetary and fiscal support announced by the leading economies over the past several weeks represent a global loosening of policy without precedent in peacetime.
Governments and central banks, led by the US Federal Reserve, have gone all in, helping stabilise markets and fuelling demand for assets backed by stimulus, such as government and corporate bonds.
Second, and more importantly, there are tentative signs that several major economies " in particular, Italy, which accounts for one-fifth of the global deaths attributed to Covid-19 " are beginning to flatten the steeply rising curve of infection. Death tolls also appear to have plateaued.
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Hopes that the spread of the disease is slowing come just when Wuhan, which has been sealed off from the rest of China since the virus first took hold in the city in January, is ending its mass quarantine, and when several countries in Europe, notably Austria, are preparing to ease their own curbs on travel and commerce.
The increasing focus on exit strategies is raising expectations that economic activity is about to restart.
As The Morning Porridge, a prominent market newsletter produced by Bill Blain, noted on Monday, the market narrative is starting to "shift from the immediate crisis to recovery".
Yet the uncertainty about the shape of the recovery, at a time when the epidemic is still spreading rapidly in many countries (especially the US, Britain and France) and when the scale and severity of the economic collapse has invited comparisons with the Great Depression, cannot be overstated.
Any improvement in sentiment at this stage should be viewed with a great deal of scepticism, especially when many US states have yet to impose lockdowns, when even those countries that introduced tough restrictions are unsure how to revive economic activity without further endangering public health, and when markets themselves remain extremely volatile.
While the global economy's virus-induced slide into recession was rapid, the resumption of activity will be anything but swift, and is likely to be marred by stops and starts given the inherent tension between efforts to contain the epidemic and steps to reopen the economy.
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Although markets have seized on signs that infection rates are slowing, the reality is that they are still far too high for investors to be confident about the effectiveness and duration of the lockdowns and, hence, the length and severity of the global recession.
The path to normalisation of economic activity is a perilous one, made more treacherous by political and policy disagreements over how to respond to the pandemic, and the uncertainty about countries' exit strategies.
In Europe, long-standing divisions over the governance of the single currency area are undermining efforts to tackle the outbreak.
On Wednesday, the euro zone's finance ministers were unable to agree on the terms of financial aid from the bloc's bailout fund as Italy, one of the worst-hit countries, fumed at the Netherlands' insistence that tougher conditions should be attached to the loans. Covid-19 appears to be bringing out the worst in Europe's political leaders.
Just as worryingly, in the absence of a widely available vaccine, it is unclear how consumers and businesses will react once social distancing measures are eased, especially if testing and contact tracing are not ramped up dramatically in Britain and the US.
While many investors and traders have become amateur epidemiologists since the crisis erupted, they will also need to delve into behavioural psychology. Markets need to determine not just when global infection rates will peak, but also when fear of the virus will peak.
Last month's market panic may have been overdone. However, this month's rally is woefully premature.
Nicholas Spiro is a partner at Lauressa Advisory
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