Volatile week ahead as hopes over virus wax and wane

US stocks had their biggest gains in 46 years last week, and the broad Standard & Poor's 500 re-entered bull-market territory as signs of a peak in Covid-19 cases in New York and parts of Europe stirred hopes that life could gradually return to normal.

This week, there are likely to be more wild swings for the stock market as those hopes wax and wane, as preliminary results from Covid-19 drug tests emerge and as corporations reveal their survival strategies in earnings statements.

"The focus this week has been on the number of cases," said Quincy Krosby, chief market strategist at Prudential Financial. "The reduction in the number of cases in one of the biggest hot spots in the country - New York state - helped confirm watching another proxy, Italy, which also had reduction in their cases."

It was a reflection of the contrarian nature of the stock market that the historic gains came against the backdrop of the biggest death toll of the pandemic in the US so far, and indications of the deepest contraction in economic growth since the Great Depression.

The bulls are betting that the recession will be as short as it is sharp. They are wagering that governments will find a way to contain Covid-19, through treatment, testing or otherwise, clearing the way for a rapid renaissance in manufacturing and retail activity.

Those bets drove the S&P 500 up by more than 10 per cent last week, bringing its gains since mid-March to over 20 per cent and cutting its Covid-19 related losses by more than half.

It also seems as though every shocking piece of data - whether it's the hundreds of daily deaths in New York or the 17 million people added to unemployment rolls in less than a month - is followed by another massive piece of stimulus from the US Congress, the Federal Reserve or another central bank.

Last week, no sooner had the market absorbed the blow of the 6.6 million new unemployment claims than Fed chairman Jerome Powell unveiled a US$2.3 trillion expansion of the central bank's lending programmes to businesses and local governments.

The US Congress is already preparing a new stimulus bill, before the US$2 trillion from the March legislation has even been distributed, and US Vice-President Mike Pence is already talking about the strategy to reopen the economy safely.

Ms Krosby warns that neither the Trump administration nor the Fed can flip a switch and bring the US economy back to full capacity. There is going to be an arid period for most corporations, and not all will make it through the economic desert.

The first impressions of this landscape could be sketched in first-quarter earnings reports due this week.

Strategists say this earnings season will be less about growth projections - impossible to make when nobody knows when their customers will be allowed out of their homes - and more about survival strategies.

"You are going to see a tremendous amount of focus on which ones will weather the storm , which ones will survive, which ones will have government support," said Edward Moya, senior market analyst at foreign-exchange brokerage OANDA.

If the US economy is unlikely to return to 2019 levels of output quickly, it may do so gradually. Initial indications from Chinese manufacturing data and auto makers' sales are that China is having some success since coming out of its economic cocoon.

This week, parts of Europe, including Austria, which borders northern Italy, will follow suit, gradually rolling back social-distancing measures.

Still, epidemiologists warn it could be a case of two steps forward and one step back. The biggest lift for markets, of course, would be a viable cure for Covid-19. Over the weekend, a report in the New England Journal of Medicine said a small group of patients with severe symptoms saw an improvement in their conditions after taking Gilead Sciences' remdesivir antiviral treatment.