US unrest threatens to derail the post-lockdown recovery and catch markets flat-footed

Name: Asian-Americans in New York among those joining US protests after George Floyd’s death
Uploaded: 2020-06-04T17:00:12.000Z
Duration: 3 min 30 s
Description: Asian-Americans in New York among those joining US protests after George Floyd’s death

The protests are being exacerbated by a spreading epidemic and the worst recession since the 1930s

Leaving aside the frightening prospect of a military crackdown, the unrest is putting pressure on the shaky foundations of the equity rally

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US Park Police push back protesters near the White House on June 1 as demonstrations against George Floyd's death continue. Photo: AFP

Nicholas Spiro

Published: 1:00am, 5 Jun 2020Updated: 4:15am, 5 Jun 2020

Even before America experienced its worst period of unrest since the civil rights era, financial markets and the global economy had seemed to be moving in parallel worlds.

The dramatic rally in the benchmark S&P 500 stock index in the face of the mounting human costs of Covid-19 and the sharpest contraction in global output since the 1930s has taken the disconnect between asset prices and fundamentals to a whole new level. The index is up nearly 40 per cent since hitting a three-year low on March 23, and is less than 8 per cent below its all-time high.

As I argued previously, the catalyst for the rally was the unprecedented monetary and fiscal support from the world’s leading central banks and governments, which have pledged to do “whatever it takes” to revive growth.

The determination of policymakers, led by the US Federal Reserve, to backstop the financial system has reassured investors, who view the massive amounts of liquidity as a crucial bridge to keep markets stable until the post-lockdown recovery takes hold.

Yet, the foundations of this bridge are fragile, under strain from the multifaceted shock of the pandemic. While the focus has been on the health and economic crisis, the political fallout from Covid-19 is proving just as consequential.

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Asian-Americans in New York among those joining US protests after George Floyd’s death

The coronavirus pandemic has inflamed tensions between Washington and Beijing, further undermining the credibility of January’s phase-one trade deal and heightening concerns over Hong Kong’s status as Asia’s top financial centre.