Reopening Optimism Trumps All Other Considerations As Equities Climb Wall Of Worry

Holiday-thinned trading found Asian and European equities mostly rising to kick off the new week. Even the Hang Seng managed a meager gain on Monday after initially extending Friday’s losses.

Despite rising geopolitical tensions, market participants are focused squarely on reopenings in developed economies. Japan’s move to declare an end to the country’s emergency was welcome news on that front.

“Every area of the country has met the conditions for ending the emergency, which are extremely strict by global standards”, Shinzo Abe said. “In Japan’s own way, we have largely brought the infection under control in a month and a half”. Knock on wood.

Abe did warn citizens to stay alert and said a worst-case scenario would be a reimposition of lockdowns in the the event of a serious second wave.

“The number of newly infected COVID-19 patients have been on a declining trend, with the newly infected patient count now reaching levels observed before the state of emergency was declared”, SocGen wrote Monday. “During the state of emergency, businesses with low risk of spreading the virus remained opened and mobility of people were not severely restricted compared to the US or Europe where more draconian measures were implemented”.

Stimulus measures delivered in a pair of extra budgets total nearly $1.9 trillion. The Japanese economy fell into a recession even before the worst of the virus hit, and the second quarter should show the largest contraction on record.

Meanwhile, German business sentiment is recovering. Ifo business confidence printed 79.5 for May, better than estimates and up from 74.2 in April.

Expectations rose sharply to 80.1 from 69.4. “Sentiment among German companies has recovered somewhat after a catastrophic few months”, the Ifo’s Clemens Fuest remarked. That said, Fuest notes that “many companies are still pessimistic about their business [although] the gradual easing of the lockdown offers a glimmer of hope”.

As ever, it’s important to keep perspective. 79.5 is the second worst reading in history.

ING was in no mood to sugarcoat things.

“Today’s Ifo index echoes more real-time signals that economic and social activity has started to pick up significantly since the first lifting of the lockdown measures in late April [but] just to be clear, it is currently still impossible to measure the more permanent damage the crisis has caused and what its impact will be on future growth”, the bank said, in an e-mailed note. They added the following:

Reviving economic activity and returning optimism are highly welcome but are definitely no reason for complacency or even hubris. The fact that capacity utilization in the industry has dropped to its lowest level since 2009 as well as that access to finance is a much bigger impediment to production than during the financial crisis illustrate the depth of the crisis. Even in a more benign scenario, with more gradual lifting of the lockdown measures and no second wave of the virus, the German economy is unlikely to return to its pre-crisis level before 2022.

Germany released the breakdown of Q1 GDP on Monday. Private consumption fell 3.2% QoQ while fixed capital formation in machinery and equipment dropped nearly 7%.

The decline in private consumption was the sharpest quarterly drop since reunification.

Again, these figures are going to be considerably worse going forward. In a separate note, ING quipped that considering the first quarter performance “is the result of ‘only’ two weeks of lockdown and supply chain disruptions due to lockdown measures in Asia, it does not [take] much analytical skill to predict a much stronger slump in the second quarter”.

Read more: Germany Suffers Second Largest Contraction Since Unification. And There’s More To Come.