The dichotomy between real economy and financial markets

In the face of global macroeconomic data in strong contraction, from production to export through employment, in the last few sessions the main financial markets have recorded strong increases, once again highlighting that they can run much faster than the real economy
Euphoria on the one hand, pessimism on the other. Two diametrically opposed sentiments but which in this period seem to characterize the trend of the financial markets and the real economy of the various countries, increasingly distancing them. The former, in fact, after the simultaneous collapse of the main world financial markets, between the end of April and the month of May were the protagonists of a consistent recovery of the losses caused by the outbreak of the coronavirus and the consequent lockdown.

Looking at the data that relate strictly to the performance of economies, the latest OECD estimates describe the current condition as the greatest crisis the world has known to date. Similarly, the World Bank estimates for 2020 that almost all global economies will experience a recession.
In fact, the OECD foresees a contraction in global growth of -6%, to which must be added at least another point and a half percent if there is a return to a new spread of infections and therefore new possible forced closures. On the European front, the western continent which first experienced the tragic consequences of the pandemic, the OECD itself expects a contraction of close to 10% and over 11% in the pessimistic scenario of the return of infections.

On the other hand, Italy, the first country in Europe to have had to deal with the spread of the virus and therefore among the first to apply the painful lockdown, is going through one of the most difficult periods in its history, both from the production side and from the occupation. The internal forecasts of Istat, highlighted in the latest publication “Perspectives for the Italian economy” speak of a strong contraction in 2020 GDP of 8.3% in the current year and a possible partial recovery in 2021 of over 4%.
As can be seen in the following table, however, the items that cause the most fear for the economic and social stability of the country are the sharp drop in exports and the level of unemployment. In reading the data on the labor market, which is even expected to contract in 2020 and then return to growth over 10% in 2021, it must be taken into account that compared to the average of last year in these 4 months of pandemic, about 500 thousand people have stopped looking for work, thus becoming part of the category of inactive.

In short, there are all the prerequisites to assert that the major world economies are far from being out of the crisis, perhaps just a little closer to a possible recovery that could, however, return the first evidence only towards the end of the second semester. of the year, contagions permitting. A general situation, therefore, of great economic fragility that could give way and turn into democratic and social crises.

In the face of macroeconomic data that return a contraction of the most important economic indicators, the financial markets seem to be based, once again, on the great support that comes from the measures implemented by central banks, the ECB in the lead.
In fact, in the US, the S & P500 has returned to touch the levels of the end of 2019, scoring a rally of over 40% almost as if the pandemic were only a memory of a few decades ago. The index is thus one step away from the all-time highs of the beginning of the year. All this can only make everyone happy, were it not that the basic scenario of that time was completely different in economic fundamentals, especially in terms of unemployment, which is currently rising sharply. Even then, analysts believed the levels reached were too high, let alone in this situation.
In Europe, the Eurostoxx 50, after having registered a loss close to 40% (since the beginning of the year to the minimum reached on March 18), has turned its curve bringing it back to a positive slope and recovering about 30% in the period between minimum at the end of May. The index could count not only on the positive effect of the measures taken by the European Central Bank (the only one to have fielded two Quantitative Easing, one to support inflation and one to contain the shock of the pandemic) to contain implications on economies, but also on a (partial) rediscovered sense of unity.

So, is it really possible that, regardless of the type of recovery (V-shaped or not) that there will be, the stock markets could remain close to the levels of the beginning of the year despite a completely different macroeconomic situation?
The most plausible answer is that the large recovery achieved was almost exclusively supported by the confirmation of expectations regarding monetary policy initiatives and support for the unlimited recovery of the central banks. In fact, once the appointments with the declarations of the international institutions were exhausted, as early as the end of the second week of June, the main shares that had led the rally turned negative. This indicates on the one hand a partial profit-taking, but above all an indication that market sentiment is also heading towards a defensive attitude based on macro data and on the evolution of contagions, much less optimistic than the recent evaluations of the stock markets.
Even before the outbreak of the pandemic and the resulting global crisis, the extreme dependence of financial markets on the declarations and measures adopted by central banks was evident. The huge liquidity pumped in recent years, which does not find safe yields on bonds, can only go towards equity, inflating valuations and sometimes detaching excessively from economic fundamentals.
The current emergency requires adopting once again, as in the previous crises, extraordinary measures with a strong impact both on economies and to contain losses on the markets, which in a fluctuating and discontinuous way, persevere in their path of detachment from the economy real.

By Domenico Greco

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