Stimulus measures and signals that economies will gradually open up are helping to sustain financial markets. Stock markets ended Easter week on a positive note, while this week they are turning somewhat weaker again, but in general showing smaller movements than earlier this spring. In US dollar terms, the MSCI All-Country World Index of equities as well as broad American share price indices have recovered 40-50% of their decline since the February highs.
In many cases, statistics on the spread of COVID-19 are trending in the right direction. This has fuelled hopes that today's far-reaching crisis measures can perhaps start to be rolled back. Wuhan, the Chinese city where the spread of the novel coronavirus began, reopened just before Easter. Countries such as Denmark, the Czech Republic and Austria have started reopening preschools and selected businesses this week. In the United States, President Donald Trump has indicated May 1 as a potential reopening date, although France has preliminarily extended its lockdown until May 11. On April 15, the European Commission also published a joint "roadmap" on how a gradual lifting of COVID-19 containment measures might look.
European "roadmap" towards lifting COVID-19 containment measures
Trump blames the WHO
The US is following through on last week's threat and is temporarily suspending its contributions to the budget of the World Health Organisation (WHO). According to President Trump, the WHO has been too trusting of China and bears responsibility for the global coronavirus pandemic, since it failed to obtain and share essential information during last winter's outbreak.
More new fiscal and monetary stimulus packages
After several days of negotiations, European Union finance ministers reached agreement on a coronavirus rescue package totalling EUR 500 billion. Part of this will consist of aid for small and medium-sized businesses via the European Investment Bank, while other funds will go towards national labour market benefit programmes as well as health care and other costs generated by COVID-19. A separate stimulus fund will also be made available later; its scale has not yet been decided.
The US Federal Reserve has also delivered a massive relief package and, among other steps, has started to buy corporate bonds. This has had a clear impact on yield gaps between US Treasury and corporate bonds, causing the prices of corporate bonds to climb.
Sweden's government presented its spring budget on April 15. Much of the contents has already been described in recent weeks, since the government has unveiled five "amending budgets" aimed at limiting the spread of the virus and softening its impact on the national economy. The spring budget forecasts that Swedish gross domestic product (GDP) will fall by 4% in 2020 and that unemployment will climb to 9%. SEB's current forecast is a GDP fall of 6.8%.
Swedish Spring Fiscal Policy Bill
Historical oil agreement is not enough to prop up prices
Donald Trump has worked hard to bring an end to the oil price war between Saudi Arabia and Russia, since the dispute has threatened the US oil industry and related jobs. During the Easter weekend, the OPEC+ oil exporting countries reached an agreement to reduce their output by 9.7 million barrels per day starting in May. Yet oil prices have continue to fall, based on concerns that the agreed restrictions on production will not be enough to offset plunging demand due to the coronavirus crisis. On April 15, the International Energy Agency published a report predicting that global oil demand in April may fall by more than 20 million barrels per day. This again pushed Brent crude prices below USD 30/barrel.
Deeper recession forecasts
According to the latest report from the International Monetary Fund (IMF), global GDP will shrink by an average of 3% this year; falling 6% in advanced economies. Assuming that the coronavirus pandemic fades during the second half of 2020 and that official stimulus measures will limit bankruptcies and unemployment, the IMF expects a rather powerful rebound next year, in the range of 5.8%. However, this would be far from restoring global GDP to the level previously expected by the end of 2021.
IMF World Economic Outlook
Our market view
Given our main scenario, it will not be a question of whether the economy turns around, but when. And of course a question of what happens before then. As for whether things will get worse before they get better, that remains to be seen. We expect a series of dramatically negative macroeconomic statistics in the near term. On the other hand, after the stock market declines of recent weeks, a lot of negative news is already priced into market expectations. Once developments more clearly suggest that the world will move towards normalisation within a reasonable time period, share prices will probably also have shifted to a more positive trend. But the road ahead is lined with extreme uncertainties.
Another common pattern is that after a rapid initial downturn, we see one or more "false starts" before the market rebounds in a lasting way. Obviously it is hard to predict whether it will happen this time around; perhaps investors will choose to see through bad news and focus on the recovery that all the powerful official actions have led them to hope for.
Signs of a flattening curve in the spread of the virus, as well as continued vigorous stimulus measures by both governments and central banks, have awakened hopes that the crisis will not need to last so long, that the economic downturn can be limited and that the recovery can be accelerated. Such signs have also persuaded European governments to take steps towards reopening their economies. Taken together, these factors have caused stock markets to continue the upturn that began in late March.
Although future scenarios have become both clearer and potentially brighter, at present we are living in a frightful economic environment. The difficult art of forecasting is especially challenging when we lack historical parallels, and there are monumental uncertainties connected to factors that economists cannot assess. But according to the International Monetary Fund (IMF) and most other observers, the absolute bottom of the downturn will occur during the second quarter of 2020. After that, an economic recovery will begin. How quickly this occurs will depend on the spread of the virus, the impact of the unprecedented stimulus measures and, in particular, how we consumers behave as conditions become more normal.
We can surely anticipate that many things will be different, but we still expect a recovery to occur in such a way that we will eventually "re-start" the economy, albeit from a lower level. The same will apply to stock markets. Given this background, it does not seem unreasonable that share prices have climbed from the lows seen a few weeks ago, but the upturn has been a bit rapid and strong considering the uncertainties that still prevail.
At present, we thus see clear risks that the weak economic statistics likely to be published over the next few weeks, and the risk of renewed worries about the spread of the virus, may lead to new share price downturns. But assuming that the light at the end of the tunnel largely persists, such news will probably be regarded as buying opportunities. Remember that some of the most successful long-term investments have often been made when uncertainty was at its greatest: something that is likely to be true this time as well.
Please contact your private banker if you have any questions or concerns.