The equity market rally that extended from late-March to early-June\u2014pushing the S&P 500 within 5% of February’s record high\u2014faded over the past month as investors balanced improving economic data with concerns about a resurgence in COVID-19 infections. Oil prices, too, haven’t been able to break out of their recent range with WTI hovering around US$40 per barrel, $20 less than at the start of the year. Equity market volatility remains elevated compared with recent years, and demand for the safety of gold has pushed prices to a nine-year high.<\/p>\n
To be sure, recent data have signaled a stronger than expected rebound in activity in many advanced economies. Significant government support underpinned plenty of pent up demand as restrictions have been relaxed. But the path forward remains fraught with risks. Look no further than the United States, where easing of physical distancing measures resulted in the number of infections accelerating in many states. Even countries that better controlled the pandemic, like Australia, have had to re-impose lockdown measures in some areas. Many European countries, and Canada, have kept their case curves flat. But that doesn’t mean easing of restrictions, and the nascent economic recovery, can continue apace.<\/p>\n
It’s also worth keeping in mind that these economies have a deep hole to climb out of. Even with declines in activity generally contained to March and April, the IMF expects the global economy will contract by 5% this year (global growth only slowed to zero in 2009). The OECD’s forecast was a bit more pessimistic, and highlighted that a potential second wave of outbreaks would cause an even deeper contraction this year, and a limited recovery in 2021. Monetary policy is set to provide significant support in any case, but a return to widespread lockdowns would test the capacity of fiscal authorities.<\/p>\n