Market joy over lifting of coronavirus lockdowns ignores the looming risk of a second outbreak

The S&P 500 climbing back to near pre-pandemic highs shows the global economy is reacting warmly to news of countries reopening for business

Western economies are not as well-equipped to handle the risk of another outbreak after struggling to enact measures to break the chain of infection

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A pedestrian wearing a mask crosses a near-empty street in the central business district during the “circuit breaker” lockdown in Singapore on May 20. Singapore will allow more businesses to reopen on June 2 after a nationwide lockdown cut transmission of the coronavirus among citizens and permanent residents. Photo: Bloomberg

Published: 9:00pm, 28 May 2020Updated: 10:16pm, 28 May 2020

In financial markets, sentiment is strongly signalling that the worst of the Covid-19 pandemic has passed. In the past two months, the mood among investors has improved dramatically, particularly in equity markets. The benchmark S&P 500 index has risen 36 per cent since hitting a three-year low on March 23, leaving it less than 11 per cent below its record high set in mid-February.

While a sizeable portion of the rally is attributable to the massive monetary and fiscal stimulus deployed by leading central banks and governments to counter the fallout from the coronavirus, a crucial driver of sentiment is the gradual lifting of lockdowns in major economies amid signs that output is starting to recover.

According to an index of the stringency of shutdowns and social distancing measures across the world, compiled by the University of Oxford’s Blavatnik School of Government, containment policies have already eased significantly in a number of economies, notably Italy, one of the worst-hit countries. Other nations, in particular the United States and Britain, are beginning to lift their lockdowns.

Moreover, recent survey data points to a pickup in economic activity, albeit from shockingly low levels. Euro-zone manufacturing and service sector output rebounded this month while remaining firmly in contraction territory, preliminary data from IHS Markit shows. Meanwhile, US consumer confidence has stabilised, despite tens of millions of Americans having lost their jobs in the past two months.

In a report published last week, J.P. Morgan declared that “the global economy is opening up, set to generate one of the strongest growth outturns on record [in the third quarter]. The lift-off has begun in May for all but China, whose jump-start began in March.”