Downbeat assessments of the economic impact of Covid-19 from America’s central bank and the International Monetary Fund failed to dampen spirits on the world’s stock markets as they bounced back strongly from recent heavy falls.
Shares in both Europe and the US posted gains on hopes that a mooted $1tn (£780bn) US infrastructure plan and a decision by the Federal Reserve to buy corporate bonds would boost chances of a V-shaped recovery from the pandemic-induced recession.
The US central bank took markets by surprise by announcing that it would buy the lowest investment-grade bonds as part of its quantitative easing programme in an attempt to save jobs and stimulate investment.
The announcement brought to an end a sell-off in shares prompted by concerns that a pick-up in Covid-19 in some southern US states would lead to the reimposition of lockdown restrictions and slow the pace of recovery.
The S&P 500 and the Dow Jones Industrial Average were both up by more than 1.5% in early trading in New York that coincided with the Fed’s chairman, Jerome Powell, telling US legislators that recovery would be a long road and leave the world’s biggest economy “well short” of where it stood in February, before the crisis began.
“Recently, some indicators have pointed to a stabilisation, and in some areas a modest rebound in economic activity,” Powell said in evidence to the US Senate. “That said, the levels of output and employment remain far below their pre-pandemic levels, and significant uncertainty remains about the timing and strength of the recovery.”
Investors received mixed signals about the state of the US economy, but paid more heed to a record 17% increase in retail sales in May than the more modest 1.4% rise in industrial production.
In London, the FTSE 100 – the gauge for the UK’s leading quoted companies – closed almost 3% higher at 6242.79. Germany’s Dax index finished the day 3.4% higher. Oil prices also rose on optimism that demand for crude would bounce back more quickly than expected.
Powell’s cautious tone was mirrored by Gita Gopinath, the IMF’s economic counsellor, who used a blog to signal that her organisation would revise down its estimate of growth when it provides an updated 2020 forecast next week.
The Washington-based IMF said in April that it expected the world economy to shrink by 3% this year, but completed work on the forecast before the scale of the lockdown became apparent.
Gopinath said: “For the first time since the Great Depression, both advanced and emerging market economies will be in recession in 2020. The forthcoming June World Economic Outlook Update is likely to show negative growth rates even worse than previously estimated. This crisis will have devastating consequences for the world’s poor.”
She added that the “great lockdown” differed from previous crises in that it was hitting services more than manufacturing, inflation was continuing to fall despite the impact on the supply of goods, and there was a “striking divergence of financial markets from the real economy, with financial indicators pointing to stronger prospects of a recovery than real activity suggests”.
Despite the recent correction, Gopinath said the S&P 500 had recouped most of its losses since the start of the crisis; the FTSE emerging market index and Africa index were substantially improved; the Bovespa index had risen significantly despite the recent surge in infection rates in Brazil; and flows of funds to emerging and developing economies had stabilised.