FXStreet notes that uncertainty related to health, economic and political issues is still very high, and yet stock market indices have already recovered sharply. It is clear that this is explained by the abundant liquidity created by central banks and the long-term real interest rates. When uncertainty declines, then these same monetary conditions will lead to a surge in share prices, according to analysts at Natixis.

“Currently, uncertainty regarding the health situation is still very high as the Covid-19 virus continues to spread. Political uncertainty is also high due to tensions between the United States and China, new protectionist threats and the US presidential election. Yet the equity market has already recovered sharply, and PERs are already well above pre-COVID crisis levels.”

“The role of the highly expansionary monetary policy conducted in OECD countries is well known: thanks to the surge in the money supply, part of the money held is invested in equities; monetary policy is shifting to yield curve control and control of long-term interest rates, which has led to expectations of a long period of negative real long-term interest rates. The excess money supply and negative real long-term interest rates are driving up share prices and equity valuation.” 

“Once uncertainty declines (precise date known for a COVID vaccine, visibility on 2021-2022 growth, etc.), share prices will soar due to massive investment of the liquidity in equities and negative real long-term interest rates.”