We expect markets to continue their recent rally

As Italian and Spanish new coronavirus case growth has slowed, sentiment has been buoyed, culminating in the US market’s 7% rally on Monday. Both countries represented the epicentre of the European impact and therefore are expected to be the first in Europe to see the flattening of their respective new case curves. Clearly there are unknowns still out there, particularly as to whether the state-by-state lockdown in the US will be effective, however continued evidence that when the lockdown is imposed the duration is closer to 2 months than as long as 6 months is a positive.

The big question on everyone’s minds is what the exit from lockdown will look like in the western world. Expectations are for some phased resumption of normal activity possibly supported by technology to allow more effective contact tracing in the event of a second outbreak. Austria and Denmark appear to be at the forefront here with small shops opening in Austria next week. This would begin a phased reopening of the economy over the next month assuming new case growth does not pick up dramatically. This suggests a timeline of a return to relative normality by the start of June however supply chains are likely to remain disrupted for some time after this which means that a U-shaped recovery continues to be an outcome.

The Eurozone was expected to launch a €500bn fiscal package today to combat the economic downturn until normal business resumes. The agreement is still being debated over as southern European countries accuse northern countries of not doing enough. The expected package is likely to be made up of three elements, healthcare support, credit guarantees and an unemployment relief scheme. At 4.5% of GDP this is expected to be a substantial first step, but other EU wide measures are likely to be needed. Coronavirus has yet again stirred a feeling from the southern European nations, particularly Italy, that the Eurozone does not provide sufficient support. EU policy makers will therefore be aware that a lack of action at this point could pose a longer-term threat to the EU once the coronavirus crisis is over. That said, the main market focus at the moment is on the slowing new case growth and this is leading sentiment rather than these more intangible unknowns. Should we see case growth continue to come under control and signs of continuing fiscal support in the interim, we expect markets to continue their rally.

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