WASHINGTON (Pakistan Point News / Sputnik - 25th June, 2020) The bullish mood among investors betting on a sharp economic recovery from the coronavirus pandemic versus data suggesting a prolonged slowdown has created a divergence that could force another downward correction on markets, the International Monetary Fund (IMF) warned on Thursday.
"A disconnect between financial market optimism and the evolution of the global economy has emerged," the IMF said in its Global Financial Stability Update for June. "Markets appear to be expecting a quick 'V-shaped' rebound in activity, as illustrated by the strong recovery in the S&P 500 consensus forecasts of company earnings. Recent economic data and high frequency indicators, however, suggest a deeper-than-expected downturn."
The IMF said that investors expectations were predicated on strong policy support, that included trillions of Dollars of stimulus passed by the United States to deal with the COVID-19.
This contrasted with the huge uncertainties lingering over the extent and speed of the economic recovery from the pandemic, it said.
"This disconnect between markets and the real economy raises the risk of another correction in risk asset prices should investor risk appetite fade, posing a threat to the recovery," the IMF said, noting that "valuations appear stretched across many equity and corporate bond markets".
The S&P500, a barometer for the top 500 US stocks, fell nearly 35 percent on the year in March at the height of the COVID-19-induced correction in asset prices. It, however, managed to recoup all of its losses to reach positive territory by the first week of June, after some $3.3 trillion in stimulus passed by the US Congress. Fears of a second wave of coronavirus infections drove US stock prices lower again this week,� with the S&P500 closing down about 6 percent on the year on Wednesday.
The IMF said any number of triggers could result in a repricing of risk assets, and this could add financial stress to an already unprecedented recession.
"Authorities need to strike the right balance in their policy response to the pandemic," the fund cautioned. "In an environment of difficult policy trade-offs, authorities need to continue to support the recovery while ensuring the soundness of financial institutions and preserving financial stability."
The US economy shrank 5 percent in the first three months of 2020 for its sharpest decline since the Great Recession of 2008/09. Despite all 50 states in America having reopened their economy from COVID-19 lockdowns, economists still warn of sharp recession by the second quarter.
