The last week since the outbreak of the corona crisis has been the first relatively boring week at the markets after a long while. Most global equity markets have been only slightly negative in the low single-digit percentage range since last week. The extent of the corona crisis is now known to market participants, quantitative approaches have long since reduced their positions, economists are trying to predict the economic consequences of the lockdowns and decision-makers have to weigh the risk to public health against the risk of falling into a serious economic crisis like the Great Depression.
The coming weeks are likely to be characterized by a further decline in volatility, as the first shock has passed and there are no surprises in the short term. People around the world are spellbound to see the development of infection and deaths and hope to see a turnaround and a significant decline in growth rates. This calm could still be our undoing. As Bill Gates announced in the Washington Post on March 31, a premature withdrawal from the lockdown must be avoided. Otherwise there is a risk of a second, even worse wave of infections. According to Gates, the lockdown in the US must be maintained for at least ten weeks and apply nationwide without restrictions. The same should apply to all of Europe.
Since this is not the case, I fear that some countries will loosen the lockdown measures too early because of their fear of a total economic collapse. It also seems to me that in the event of an emerging second wave, testing efficiency is not as good as that of China or South Korea. It therefore seems likely to me that there will be a second wave in Europe and probably also in the USA. However, this would be the case only after 1-3 months.
Until then, I expect a less volatile but yet steady decline in most markets. However, a surprising discovery of a therapy, medication or vaccine would be the starting signal for a strong recovery in the stock markets. If, on the other hand, there are unexpected bankruptcies, especially of companies with which nobody would have expected, a further sharp sell-off could take place on the markets.
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Bertan Gueler, CFA