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Investing

Markets are more in tune with the economic reality

18 1 - Global Banking | Finance

By Rupert Thompson, Chief Investment Officer at Kingswood

Volatility returned to equity markets last week with the US market falling as much as 5.9% on Thursday. Global equities ended down 4.1% in local currency terms over the week as a whole and markets have opened lower today as well.

So, what has caused the abrupt turnaround? In good part, the latest falls are just a correction which had been waiting to happen following the exceptionally strong rebound since March.

That said, the news out last week did highlight the question marks hanging over the market’s apparent rosy assumption of a sharp V-shaped economic recovery. In the UK, the April GDP data showed in black and white the severity of the hit dealt to the economy by the lockdown. GDP has plummeted a massive 25% since February, swamping the 6.8% peak-to-trough decline seen in the Global Financial Crisis.

At the same time, the OECD released its latest set of growth forecasts which made for gloomy reading. The UK economy is forecast to shrink 11.4% this year, the largest decline of any developed country, on its ‘single dip’ scenario. On its alternative ‘double-dip’ scenario, it believes the contraction could be as much as 14%. The OECD saw no reason to even consider the possibility of a V-shaped recovery.

Of course, the outlook continues to hinge on whether a major secondary spike in infections can be prevented and the latest news on this front confirmed this remains a risk. Infections have started to pick up in some US states, which have been re-opened in recent weeks, and there has also been a renewed outbreak in Beijing.

The only good news last week was that the Fed confirmed that there is no danger of it tightening policy prematurely. It is forecasting interest rates to remain close to zero until at least the end of 2022. As Fed Chair Powell put it, the Fed is not even thinking about thinking about raising rates.

Here in the UK, the Monetary Policy Committee meets this coming week and looks likely to expand its quantitative easing program. It has even started to seriously contemplate the possibility of pushing rates into negative territory although this would very much be a move of last resort and is not expected on Thursday.

All this leaves markets looking a bit more in touch with the economic reality than they were a week ago. A period of consolidation, while it becomes rather clearer how well economies navigate the difficult months ahead, would make a lot of sense. However, with the surge in liquidity still in the driving seat for most of the time, hopes for a period of market calm and reflection look likely to prove wishful thinking.

Global Banking & Finance Review

 

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