While currently, manufacturing indexes are signaling a milder contraction in the economic activity of the previous month, the economy won't be able to recover properly if there is fear for property damage and while the coronavirus outbreak threatens with a second wave.
Traders and investors are currently confused regarding the direction that the financial markets in the United States are taking.
The main reason behind this confusion is the recent gains in the US index markets despite the spread of the protests against police brutality in the United States, which have not retreated despite US President Donald Trump's threats and the imposition of curfews on cities like New York. The fears for the escalation of the trade war between the United States and China are also a relevant factor at the moment, given the Chinese government's insistence on intervening in Hong Kong.
As we already mentioned, the main US stock indexes advanced for the third consecutive session. The S&P 500 gained 1.20 percent so far this week, while the Nasdaq 100 composite index added 1.07 percent.
Many attribute this bullish behavior to the fact that market actors now feel more optimistic regarding the future of the global economy. The Covid-19 pandemic spread has stabilized (and even has given up some ground) in most of the Western world and its epicenter moved to Latin America, being Brazil the most affected country of the region, which has encouraged the different governments to attempt reopening the economy.
This behavior is quite similar to the relative apathy of the market actors towards the release of certain economic performance figures, which show how the Western world economies are struggling due to the effects of the lockdown. An example of this is Australia, which according to the RBA policymakers, is facing its worst economic situation since the great depression, or Sweden, whose GDP contracted 2.6 percent in the first quarter.
It's likely that the markets have already priced this pessimism and are now focusing on the heavily expected economic recovery. Some analysts claimed that the markets are simply not overly concerned about the protests since they think that they won't lead to long-term economic damage.
"Wall Street’s relative calm about the protests perhaps is indicative that investors and traders are thinking they won’t lead to long-term economic damage," commented an analyst in Forbes, adding that there are still doubts about whether the stock markets are properly pricing the protests and the curfews.
The situation in the oil markets also aids the optimism. The OPEC+ meeting is taking place on Thursday and many expect them to extend their output cuts, which could aid the market in terms of price stability. The markets have also been rallying as of late after experimenting major losses since the beginning of the year due to dwindling demand and the instability of the OPEC+ framework.
In any case, it may be too premature to cry victory, especially since it's not clear whether the social situation in the United States will end up hindering the economic recovery. While currently, manufacturing indexes are signaling a milder contraction in the economic activity of the previous month, the economy won't be able to recover properly if there is fear for property damage and while the coronavirus outbreak threatens with a second wave.