Queasy Market Calm Masks Fear of Pandemic Endgame Echoing 2008

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An uneasy calm has settled across global markets after last quarter’s rout left a $19-trillion crater in global equities value. Yet, chances are it won’t last as the next phase of the coronavirus pandemic looms.

Volatility across asset classes has eased from March highs on signs worldwide lockdowns may have tempered the intensity of the outbreak, but that’s no guarantee infections won’t flare up again.

It’s anyone’s guess how things will evolve as nations begin to phase out restrictions, and what lies beyond summer — and that’s what will dictate investors’ sentiment and positioning in the months to come.

Price action during the global financial crisis may offer some guidance on how things may play out in the coming months, even though the two shocks are vastly different in nature. One common theme is that of unprecedented stimulus plans that helped soothe investors’ nerves in the early months of turmoil, before subsequent shock waves of crisis spread far and wide.

The copper-to-gold ratio for instance, a common risk gauge, could stabilize or even steepen in the next couple of months should life globally start returning toward normalcy — following the precedent set in Wuhan, China where flights and trains have resumed. Such a move in the relationship between the prices of the two metals would resemble its course during late 2007 and early 2008 when markets hoped the U.S. subprime crisis had been dealt with.

But there are views that current crisis is far from over, which suggests investor sentiment could easily and sharply turn to the worse. An infectious diseasesexpert has said that the coronavirus likely will be around for two years, and a vaccine likely won’t be available in large amounts for 18-24 months.

As Chris Watling of Longview Economics in Londonnotes, this year’s equity sell-off is strikingly similar to the market’s behavior during the Great Crash of October 1929 and Black Monday in October 1987. And if history repeats itself, fresh lows are yet to come.

That may explain why short-dated euro corporate bonds — which lost almost four years of returns in a matter of weeks — may find the going even tougher in the months to come.

Heineken NV scrapped its 2020 forecasts on Wednesday, joining a growing list of companies that withdraw their earnings outlook for the year. One-month implied volatility on the brewer’s shares rose above 40% once again, double its past-decade average.

Expectations of large price swings remain high in currencies as well, where a “back to the future” moment seems brewing. Long-term bets look set to turn more expensive compared to shorter-dated ones due to the uncertainty about the pandemic endgame. That pattern will be reminiscent of the collapse of Lehman Brothers, one of the most emblematic moments of the 2008 crisis.

Add to the mix that traders opt for option bets that see afunding blowout in few months’ time, and it may be prudent for investors to prepare for a crisis that won’t be resolved as soon as lockdowns are lifted.

  • NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

— With assistance by Tasos Vossos

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