Markets are Trying to Buy the Dips of Quarantine

On top of this, governments are increasing measures to support small businesses and large companies. These decisions lead to an increase in demand for the purchase of shares of strong companies, which, according to market participants, were undeservedly sold out during the market crash earlier this month.

The announcement of new liquidity support measures by the Fed and the impressive (almost 20% of GDP) stimulus package in Germany have renewed the interest of markets for purchases. Futures on US and European stock indices have been rising more than 4% today.

At the same time, the markets are moving in contrast to the economic news, which is showing a decline in business activity on PMI indices. These indices have become a kind of universal measure in recent months, as the same methodology is used for different countries, with most of them publishing in the course of today.

Already released data from Japan and France showed a sharper than expected decline in activity in the service sector. In France, the PMI for the services sector collapsed by 29, the lowest level in the history of this study with a large margin. Business activity in the country collapsed at its highest rate in 22 years of research, indirectly indicating a more than 3% decline in the coming quarters.

Germany’s composite index was also weaker than expected. In essence, the service sector index declined to 34.5 vs 43 expected, the composite index fell to 37.2 from 50.7 a month earlier, vs 41.5 expected.

Indicators for Italy have not been published, but they would have come out even worse than these.

A month earlier in China, we also witnessed higher economists’ expectations against real statistics. Such dispersion once again shows a substantial undervaluation of quarantine impact on the economy.

The markets are reacting as if the data is the matter of the past. And the best strategy, for now, is to try to buy at the peak of fears. But this can be a dangerous mistake.

Quarantine measures have increased dramatically in recent weeks, but they were not enough to contain the increasing number of new cases in Germany, Spain, France. Even more so in the United States. Over the past 24 hours, the number of new cases there grew by more than 10K, accounting for more than a quarter of all new cases. In other words, neither the pandemic situation, nor economy has reached a turning point.

With such background, the final business activity data in March and statistics in April may turn out to be even worse, risking turning the health care crisis into an economic one. The proactive steps of the Fed, ECB and many other central banks has so far helped to offset the risks of a full-fledged financial crisis. But this means that markets have passed the peak of volatility, but not the lowest point. After a short bounce, stocks and commodity assets may turn back to decline, without a real recovery in demand.

 by Alex Kuptsikevich, the FxPro senior market analyst.