Coronavirus: the crisis will last "for years"

"The number of deaths from the virus situation has exceeded 490,000", is the title of the news that caught the attention of investors last week. The mission has not been completed, the virus continues to wreak havoc in several countries, including the India, Russia and the US.

Hopes for a solid economic recovery after the virus situation are now burnt toast. The risks of governments reimposing blockades are high, and the monetary stimulus policies that account for most of the recovery in asset prices since the March lows will be less effective in the future if they do not translate into a rebound in economic activity and better prospects for corporate profits. Risk appraisals remain high and the next few weeks will tell us if they will continue to be held or if they will be affected.

At this point, there is a lack of clarity, because even the technical indicators share a similar point of view. The S&P 500 closed 11 points below its 200-day moving average at the end of last month and is now at a robust 3170 points. If the index moves two or three days below these two benchmarks, it will attract more sellers and could drop the index 5-10% below current levels. However, if the index remains up, it could have the opposite impact, but it will lead to further divergence in fundamentals, which in theory should not continue for long, unless governments provide new plans for fiscal stimulus.

The divergence is not only between asset prices and fundamentals, but also within assets. 10- and 30-year US Treasury bond yields are at their lowest level in a month, at 1.40% and 0.63% respectively, indicating that there is still a strong demand for the security that comes with US government bonds. If yields on long-term maturities continue to fall, it would mean that large investors reduce their risk exposure before the third quarter.

Although the trajectory of virus deaths remains the most effective risk barometer, investors should keep an eye out for other factors this week.

In the longer term, market players should keep an eye on US election polls. Biden has so far led by a significant margin and the market doesn't seem to have taken it into account yet. Joe Biden has made it clear that he will repeal Donald Trump's corporate tax reforms, which requires a substantial revision of future profit forecasts. If he continues to lead the polls, we can expect a further decline in the stock markets.

The S&P500 is still above 3000 points

US stocks are on the verge of a recovery, with equity futures entering positive territory now. However, Asian stocks are down as of this writing, despite the fact that May industrial profits in China were a positive surprise with 5.9% year-on-year growth.

Fears over the global Covid situation continue to be the main driver of global market sentiment. Tthe number of cases worldwide has surpassed 9.9 million, with a death toll close to 490,000 people.

The figures largely contradict the optimism that has dominated the stock markets in recent months, which has experienced a surprising rise since March. However, amidst these doubts, the S&P500 still remains above the 3,150 level, indicating that the markets are still waiting to see what will happen.