Global stock markets are still in the vortex of the #COVID-19 crisis

After the 'Black Thursday', global markets fell again on 15 June, with the MSCI AC Asia ex-Japan index down 2.34% and Nikkei 225 down 3.47%; South Korean stock market fell even more, with the KOSPI plunged 4.76%; Hong Kong's Hang Seng index fell 2.17% and China's A-share market also falling somewhat. Europe's main stock indices fell sharply across the board in early trading. According to data, as of 15:16 Beijing time, the UK FTSE 100 index, the French CAC40 index, and the German DAX index fell 2.15%, 2.87%, and 2.80%, respectively. Meanwhile, US stock index futures fell sharply, with the Dow Jones 30 down 3.49%, the S&P 500 down more than 3%, and the NASDAQ 100 down 2.45% by the same time. Risk aversion surged, with the S&P 500 VIX index futures, a fear gauge, rising 13.57%. What is happening in financial markets is characterizing a second correction. International crude oil futures also fell under the influence of risk aversion, with WTI crude futures fell 4.91% and Brent fell 3.59%, write Chan Kung and Wei Hongxu.

The decline in global stock markets could be deemed as a continuation of last week's sharp pullback in the US stock market. The correction came amid heightened fears of a resurgence of the coronavirus and investors' profit-taking after a sharp rebound in the stock market. As Anbound once pointed out, the change in the pandemic is still the main factor affecting the stock market. A rebound in the current outbreak will weigh on global markets.

Statistics show that on June 14, the number of cases in eight US states over the past three days was the highest ever recorded, suggesting a second wave is fast approaching. According to real-time data from Johns Hopkins University, as of 7h30 15 June, Beijing time, there were 2,092,900 confirmed cases of COVID-19 in the United States and 115,700 deaths. In countries such as Brazil and Russia, COVID-19 is spreading at an accelerating pace. At the same time, in China where the pandemic situation is basically under control, new cases have appeared in Beijing. This means that outbreaks will persist for a long time, depending on the pandemic cycle in countries. Until the pandemic is brought under control, no country alone is likely to get better. The long-term nature of the pandemic makes the global capital market sink into the vortex of crisis, making it difficult to achieve real recovery.

This market adjustment can be said to be a correction of the divergence between the equity market and the real economy. In fact, the rapid recovery in US stocks means that the separation between finance and the real economy has become increasingly serious because the economy has not risen in tandem with it and is more about changes in expectations. The slow recovery in the real economy is causing investors to adjust and correct overvalued stock prices. The cautious outlook for the U.S. economy from last week's Fed meeting has raised doubts in financial markets. A flurry of cautious comments from Fed officials has further worried markets. #

On 14 June, Dallas Fed President Robert Kaplan expressed concern about the recovery. He noted that the US unemployment rate will remain high at or above 8% through the end of the year. This statement has added to market nervousness. Although the economic data released by China reflected the gradual recovery of the economy, neither industrial output, consumption nor investment figures met market expectations. ANBOUND has once pointed out that COVID-19 has a "long tail effect" that lasts for a long time and varies from country to country, which will have a long-term impact on economies. The inability of the real economy to recover in the short term is wearing off investors' optimism and making a correction inevitable.

According to the observation of the capital market by the ANBOUND’s researchers, the previous V-shaped rebound of US stocks was actually a "surplus capital effect". The unprecedented release of liquidity after the unprecedented stimulus policies of central banks in March eased the liquidity crisis and raised the market's optimism about the pandemic and the economic outlook, fueling the stock market bubble. Under the impact of COVID-19, the response measures chosen by countries around the world have not been able to get rid of the pattern of massive policy easing.

Central banks’ bail-outs and the "recovery" of the world economy will also continue to exacerbate excess capital in the markets. When the negative effects of central banks’ massive policy easing start to appear, the stock markets will also move towards a correction. Once markets are fully aware of the long-term and complex nature of the recovery, they are more likely to adopt cautious and risk-averse strategies, which will further push markets to the bottom.

Financial markets, which have experienced a rapid V-shaped recovery, are negatively affected by the ultra-loose policies of central banks such as the Fed. In the course of the second correction, market sentiment will decline. The Fed and central banks will have a harder time rescuing the market, because the back-and-forth in investor sentiment will make future stimulus less effective. In addition, under the "long tail effect" of the pandemic, it is difficult for the capital market sentiment to recover. Future capital markets will remain volatile, making it difficult to restore rationality.

Conclusion

The continuation and rebound of Covid-19, as well as the adjustment of economic recovery expectations, will lead global stock markets into a crisis vortex of a second correction after a rapid V-shaped rebound. In the context of "excess capital", such adjustments can be drastic and affect economic recovery or even create new crises.

Founder of the  Anbound Think Tank in 1993, Chan Kung is now Anbound Chief Researcher. Chan Kung is one of China’s renowned experts in information analysis. Most of Chan Kung‘s outstanding academic research activities are in economic information analysis, particularly in the area of public policy.

Wei Hongxu, graduated from the School of Mathematics of Peking University with a Ph.D. in Economics from the University of Birmingham, UK in 2010 and is a researcher at Anbound Consulting, an independent think tank with headquarters in Beijing. 

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