By Thyagaraju Adinarayan and David Randall
LONDON/NEW YORK (Reuters) - The reality that the coronavirus crisis is far from over is threatening a blistering equity market rally that had taken some world indexes to fresh highs.
Global stocks tumbled on Thursday and bonds rallied on fears a rise in new coronavirus cases could hurt a rush to open economies. Lockdown measures to curb the virus' spread had triggered a prolonged economic slowdown, a threat investors broadly looked past in recent weeks as they focused on improving data and support from the U.S. Federal Reserve.
But on Wednesday, market participants cited concerns about U.S. states such as Texas, Florida and Arizona, which were seeing a fresh surge in cases.
"Those who were expecting more of a V-shaped recovery are taking that expectation down this morning in light of the new evidence," said Katie Nixon, chief investment officer at Northern Trust (NASDAQ:NTRS) Wealth Management. "Right now, it feels like there’s a fragility around the latest rally."
Total U.S. coronavirus cases surpassed 2 million on Wednesday, according to a Reuters tally.
A Reuters analysis earlier in the week showed twenty-one U.S. states reported weekly increases in new cases of COVID-19, the disease caused by the virus, with Arizona, Utah and New Mexico all posting a jump of 40% or more for the week ended June 7 compared with the prior seven days. New cases in Florida, Arkansas, South Carolina and North Carolina all rose by more than 30% in the past week.
Rising cases "can quite easily reclaim the news headlines especially if there is a second round of lockdowns in certain U.S. states," said Chris Bailey, European strategist at Raymond James.
The market declines came after a sharp rally which had seen the Nasdaq index hit a new high and the benchmark S&P climb to within 5.8% of its record high. World stocks had risen to just 7% off prior peaks but were on Thursday down 2.6%, the sharpest one-day drop in two months.
Part of the euphoria in equity markets had been justified by the equity risk premium -- essentially stocks' excess future return over risk-free rates -- which has risen, given bond yields are near historic lows.
Fund managers had turned increasingly bullish, driven by a confidence that the Fed would do whatever it takes, as well as a fear of missing out on the rally.
(GRAPHIC - Fed's balance sheet vs. U.S. tech heavy weights: https://fingfx.thomsonreuters.com/gfx/buzz/ygdvzqgnbpw/Pasted%20image%201591891352969.png)
High-profile hedge fund managers Paul Tudor Jones and Stan Druckenmiller said recently they were becoming more bullish on the stock market, reversing their previous reluctance to buy into the rally. Jones' speech, reported by Bloomberg, was at the Economic Club of New York, and Druckenmiller spoke to CNBC.
The novel coronavirus has ravaged the global economy. The Organisation for Economic Cooperation and Development (OECD) forecast the global economy to contract 7.6% if there is a second wave of infections. Latin America has emerged as a hotspot, with a grim new milestone in the region of total deaths exceeding 70,000, according to a Reuters count.
Bolstering the case for optimism in the U.S. had been positive economic news. A closely watched monthly jobs report on Friday showed an unexpected fall in the unemployment rate.
"I guess people were assuming and acting like COVID-19 is something of the past, but it is actually still quite present," said Stephane Ekolo, an equity strategist at TFS Derivatives in London.
U.S. Federal Reserve Chair Jerome Powell on Wednesday said it was evident that if there were a second wave of the virus, it could hurt the economic recovery. Still, U.S. Treasury Secretary Steven Mnuchin said on Thursday the United States could not let the coronavirus shut down its economy again.
Market participants also said a rise in infections may not equate to more lockdowns. Edmund Shing, global head of equity derivatives strategy at BNP Paribas (OTC:BNPQY), said rising U.S. infections were not in the hardest-hit states like New York.
"Does it mean they need a second lockdowns? My guess is for most parts probably not," Shing said.
(GRAPHIC - World stocks add $19 trillion in market value: https://fingfx.thomsonreuters.com/gfx/buzz/nmovakryqva/Pasted%20image%201591891087121.png)