Uncertainties over COVID-19 impacts fuel market fears

Subject

Financial market reactions to the pandemic

Significance

While policymakers and epidemiologists broadly agree that the only viable approach for substantially relaxing lockdowns and social distancing measures is mass community testing and contact tracing, there are significant differences of opinion on how sharply infection curves need to flatten before restrictions are eased. The risk that lockdowns -- which have become dangerously politicised -- will be lifted prematurely, causing a second wave of infections, poses a significant threat to the global economy and markets.

Impacts

• The US S&P 500 equity index has surged since late March, but the bleak corporate earnings outlook means this is unlikely to be a bull run.
• The spread between Italian and German bonds has widened since late March, reflecting investors' persistent doubts about EU cooperation.
• The major central banks are likely to invest more than twice as much in sovereign and corporate bonds as in 2008, distorting bond markets.