The looming presidential vote in the USA and the almost exponential expansion of infections from Sars-Cov-2 in Europe and America, seem to leave world stock markets indifferent as they continue undeterred in the lateral phase of accumulation which began after the brief correction of September.
In fact, if we take the US S&P 500 index for example, it is even in the upper part of the range expected after the recent correction, delimited by 3588 and 3200 points. The explanation could be simpler than you think, in the sense that the stock market is an efficient mechanism for discounting the prospective economic dynamics, therefore it superficially considers current events, while punctually evaluating what may be the economic scenario in 12/18 months. Therefore, the electoral result of November 3, which among other things risks being confirmed only next January, when the new US President will take office by law, could only cause a certain short-term volatility, as in spite of electoral programs, the new executive will have no room for maneuver given that facing the economic crisis caused by the pandemic involves an obligatory path. At the moment the polls continue to indicate an advantage of a few percentage points for the Democratic candidate but a psychological element regarding US voters is given little consideration, consisting of the fact that in a period of serious economic / health crisis, the propensity to maintain the incumbent could prevail, although not particularly revered, rather than starting a new course full of unknowns. For now, the lack of a negative reaction to the evolution of the pandemic crisis can be perhaps explained by considering that it is a classic “Black Swan”; that is to say an absolutely unpredictable event destined to exhaust itself over time. So the stock markets have already discounted the negative consequences on 2020 GDP with the major spring decline, but now they are looking beyond, assuming that starting from the second quarter of 2021 the international economic cycle will normalize returning to the dynamics that were expected at the beginning of the year, when the pandemic was not a concern. Following this line of reasoning, it is observed that the problem is not whether the virus will be eradicated with a vaccine or if, as in similar past cases, it will naturally disappear, but how long it will take for this to occur. In fact, the working hypothesis that the GDP of the major industrialized countries could register a V-shaped recovery in due time, like that recorded by the stock indices, in particular in the USA and China, now depends on how long the selective lockdowns of the various economic activities aimed at containing the infections in the second phase. Therefore, it is clear that the markets do not in any way discount a generalized closure of non-essential activities, considered unsustainable, in which case the predictable stock market scenario would follow that recorded in the 2008/2009 crisis, with a second decline about six months after the first . Fortunately, unlike what happened in March 2009, when the second trough was lower than that of October 2008, now the enormous creation of liquidity implemented through both monetary and fiscal policies, quantifiable when fully operational, spring 2021, in approximately 30 trillion dollars, equal to about 30% of world GDP, will limit the downside potential of the S&P 500 index to 10/12% compared to the recent close and the same is true in general for the other international indices. In fact, the stock exchanges of the Far East Asian area, including not only China but also Japan, could hold up better than the western markets, both because the second phase of the pandemic is partially absent, and due to wider maneuvering leeway in terms of monetary policy, as up to now they have been conditioned by the need to keep the parity of their currencies stable against the dollar. In this regard, the greenback may have slowed the progression of the long-term bearish phase started in the middle of the year, remaining confined to the fluctuation band delimited by 1.15 and 1.20 with respect to the Euro. The events expected in the short term, such as the US elections and a probable worsening of the pandemic scenario, are compatible with an increase in volatility also in the foreign exchange sector, which will however remain within recent fluctuations.
Nicola Bravetti Data Source: Bloomberg
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