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Why markets are making a big mistake in assuming the coronavirus threat is receding and betting on recovery
- 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
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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.
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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.
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