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Stock Markets Rise Even As Coronavirus Remains Unconquered. Why?

Stock Markets Rise Even As Coronavirus Remains Unconquered. Why?

2020-04-15 02:10:00
David Cottle, Analyst
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Global Equity Gains Despite Coronavirus, Talking Points:

  • Stock markets have risen quite sharply this month
  • These gains have come even as the coronavirus continues to smash global demand
  • Crises are not always bad times for stock markets

Since late March the world has been faced with the counter-intuitive site of rising global stock markets despite the continued spread of the coronavirus pandemic and the crippling economic blows it has dealt.

Australia’s blue-chip ASX 200 benchmark can serve as a case in point. Battered by the virus down to lows not seen since 2012, the index has recovered by well over a thousand points since March 23.

ASX 200, Daily Chart

Gains of similar or even greater magnitude can be seen across major indexes. And yet, most national economies remain paralyzed, lockdowns prevent economic engagement while growth forecasts tank and joblessness soars. The coming corporate earnings season is viewed with trepidation.

How can this possibly be a recipe for stronger stock prices? Surely this is rather an environment in which perceived haven assets such as gold should rather be soaring at equity’s expense.

Well, it’s important to point out that, longer term, it may well not be. However, there are some factors which in combination, make stocks’ current vigor explicable. Most obviously perhaps is that, whenever catastrophe strikes, there’s almost always a period of indiscriminate selling. Investors cash out to raise cash so that they’re liquid for whatever comes next.

That process has now faded and, once it has, those same investors are content to look again for value propositions. After all, crisis is never universal. The coronavirus may have scuppered energy demand, for example, and hit oil majors’ stocks. But online delivery companies have probably never worked harder as locked-down populations go online for essential goods.

Stock Markets Like Cheap Money, Wherever It Comes From

Perhaps the biggest market prop however is the monetary system itself. Modern central banking’s crisis playbook has been added to chapter by chapter since the Great Depression of the 1930s, but it involved doing a whole lot of things which stock markets like.

Interest rates are cut to the bone, vast sums are made available to prop up supply chains and employment, while tax obligations are deferred. A tsunami of liquidity is unleashed. Authorities all over the world have made unprecedented stimulus and rescue measures, crowned by the US’ multi-trillion-dollar effort.

One effect of all this is to lower ‘risk free’ bond yields on things such as US Treasury bills. This in turn means a scramble for yield, any yield, which can push investors back toward stock markets.

All that liquidity also has investors hoping that the recovery, when it comes, will see growth accelerate very sharply.

US 500 MIXED
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of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 4% 5% 4%
Weekly 21% -13% -1%
What does it mean for price action?
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Of course, things can change. Signs that economic lockdown will be prolonged, that infection rates are not apt to fall or that even the state action taken so far will be insufficient to prevent a global slump might well see risk appetite collapse again, taking stock markets with it.

But for now markets are responding to that crisis playbook much as they generally do. And to that extent stocks’ gains are understandable even if they may not be very solid.

Resources for Traders

Whether you’re new to trading or an old hand DailyFX has plenty of resources to help you. There’s our trading sentiment indicator which shows you live how IG clients are positioned right now. We also hold educational and analytical webinars and offer trading guides, with one specifically aimed at those new to foreign exchange markets. There’s also a Bitcoin guide. Be sure to make the most of them all. They were written by our seasoned trading experts and they’re all free.

--- Written by David Cottle, DailyFX Research

Follow David on Twitter@DavidCottleFX or use the Comments section below to get in touch!

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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