A Ray of Hope Delivers Riskier Assets a Boost. The Dust Has Yet to Settle, However

A ray of light shone across the global financial markets as the markets returned from the weekend.

After an alarming spike in the number of coronavirus cases on Saturday, there was a marked decline on Sunday.

In fact, the decline in the number of new cases was not just smaller but significantly smaller.

Across France, Germany, Italy, and Spain the total number of cases increased by just 16,711 on Sunday. This was well below an increase of 42,323 on Saturday.

There was a similar trend in the U.S, with the number of new cases falling back from 34,196 on Saturday to 24,774 on Sunday.

While the numbers certainly just caused for some bargain hunting, caution must still be the name of the game.

Test Kits and Weekend Numbers

The markets are yet to have a better picture of the volume of testing to be in a position to truly assess whether the spread of the virus has, in fact, eased.

A slide in Sunday numbers could well be down to a lack of testing rather than a lower number of positive results against a similar test size.

France reported a 25,615 surge in new cases on Saturday, which was then followed by a 2,886 increase on Sunday. The marked spread suggests that testing volume contributed to the figures over the weekend. One would hazard a guess that there was a marked fall in tests carried out on Sunday.

It would certainly make little sense for the governments to be overly transparent on the testing numbers. There has been plenty of news coverage on the lack of available testing kits…

Caution Warranted

So, while the global equity markets found strong support through the Asian and European sessions, caution is warranted.

The numbers will need to continue to show a downward trend over the course of the week to support market sentiment.

Tomorrow’s updates for Monday’s cases will be of material significance. Expect any talk of a shortage of test kits to test the resilience of the bulls, however…

Even Trump Gets Hopeful

Hopeful commentary from Spain and Italy, suggesting that containment measures have been effective.

For Italy, the duration of the lockdown continues to edge closer to the length of the Hubei lockdown. While Italy’s slowdown and the number of new cases are therefore feasible, those in other parts of the EU and the U.S are less so.

Just last week, the U.S President talked of a dark 2-weeks ahead. It’s quite a change of tune and one that should be somewhat confusing for the markets.

The upside we see on Monday, therefore, could quite easily reverse with gusto should we see COVID-19 numbers spike once more.

There is obviously the possibility that the number of tests is constant and the number of cases is on the decline.

The Fallout and the Economic Calendar

If there is, in fact, a sustained decline in the number of new cases in the week ahead, the focus will return to the economic calendar.

We are now receiving March and April numbers that will reflect the effects of COVID-19 on the respective economies.

The numbers will tell us the extent of the damage. An impatient market, however, would need to wait on May and June figures to assess the effectiveness of the monetary and fiscal policy.

When looking at Italy’s private sector PMI numbers for March and the continued lockdown in April, it’s going to take time.

The longer it takes for policy to kick in the more prolonged the recovery. It remains to be seen whether that would warrant another wave of selling. One thing is certain, we are unlikely to see a rebound in private sector activity as seen in China.

Once all the dust settles, perhaps a year from now, we can then look at the state of the banks and their balance sheets… This time around the governments would have every reason to bail them out…

At the time of writing, the DAX40 was up by 4.35% to lead the way. The CAC30 and EuroStoxx600 were up by 3.32% and by 2.85% respectively. Interestingly, the banks were amongst the front runners. Commerzbank and Deutsche Bank were up by 7.08% and 7.01% respectively.