Markets are Ignoring the Economy; Coronavirus is in the Spotlight

Previously, we have repeatedly noted that markets can get support when the daily increase of new cases decreases. Of course, this does not mean the end of the disease and it won’t be evidence of solving all economic problems.

But it can be the point where markets can form the basis for further growth. The incidence statistics now looks like a more reliable economic indicator than the actual data, which is noticeably lagging. Economists are catastrophically far from reality in their estimates, but markets do not notice this.

Extreme monetary easing and unprecedented stimulus announced by major governments have allowed markets to soften the decline and move away from lows.  Unprecedented restrictive measures managed to reduce the spread of the disease, which restrained the market’s freefall and reduced their volatility.

We may cautiously speak about some decline of the uncertainty because with the decreasing rate of spreading the infection, the measures to contain it are also softening.

The US labour market data published on Friday showed a decline in employment by 701k in March, compared to expected 100k. However, the employment estimates are based on data from the first half of March – even before there were 10 million initial claims for unemployment benefits in two weeks.

If the situation does not improve significantly in April, the number of lost jobs could reach millions this month. The good news is that the markets are not scared. They probably took this into account in asset prices earlier during the decline in March.

Another critical factor, as we mentioned above, was pumping the financial system with liquidity. As a result, we are witnessing the financial markets flooded with money, which reduces their value. By flooding the markets with liquidity, central banks are raising stock prices as if the tide is lifting all the boats in the harbour. However, the water in the sea is stormy, and the bottom is still rocky.

by Alex Kuptsikevich, the FxPro senior market analyst.