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Why 2nd wave of COVID-19 is a worry for equity markets

By Samie Modak
June 15, 2020 11:26 IST
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Many believe that the surge in the markets defy economic reality and is being fuelled by aggressive monetary easing by central banks across the world.

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Illustration: Uttam Ghosh/Rediff.com

Equity markets across the globe witnessed a huge spurt over the past month on optimism that the reopening of the economies will lead to a sharp recovery in growth (Chart 1).

However, investors have got a reality check with many countries once again seeing a rise in Covid-19 cases, sparking fears that a second wave could impede the nascent economic recovery.

 

Also, the US Federal Reserve's dire assessment of economic prospects spooked investors.

A sharp 7 per cent fall in the US markets on Thursday - the biggest single-day fall since March - sent most global markets tumbling (Chart 2).

While stocks recovered some of the lost ground, investors have begun to assess whether they have gone overboard with the expectation of economic recovery.

Despite the economic shocks, the technology focused Nasdaq index in the US hit new highs last week (Chart 3).

Many other global markets have also recovered significantly, though India's market cap is still about 20 per cent down this year (Chart 4).

This, at a time when the Covid-19 cases globally are inching close to 10 million with nearly half a million deaths (Chart 5).

Many believe that the surge in the markets defy economic reality and is being fuelled by aggressive monetary easing by central banks across the world.

The yield on the 10-year US government bonds, for instance, has dropped sharply, which is stroking carry trade (Chart 6).

Easy money is entering the stock market in search of high returns.

After a record sell-off in March, India has seen a sharp improvement in foreign flows since May (Chart 7).

Stocks across sectors have seen double-digit gains. However, within that, interest-rate sensitive sectors such as realty, automobile, and banking have clocked the best returns (Chart 8).

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Samie Modak
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