Overnight market action shows hope for a V-shaped recovery in important economies is fading. UK national accounts data showcased the economic damage, and pessimistic comments from US Federal Reserve chair Jerome Powell doused optimism. Underlying concerns about global trade disputes back-stopped the action. Shares, crude oil and base metals fell. Investors headed for safer haven, lifting bonds, gold and the Japanese yen.

The UK economy shrank by 5.8% in March, dragging the quarter to a 2.0% drop. Industrial production (-4.2%), manufacturing production (-4.6%) and the index of services (-6.2%) all slumped. The data is particularly concerning because lockdown measures were not fully in place, and April’s numbers will likely be worse. The pound continued its recent fall, from above US $1.26 two weeks ago to flirt with $1.22 overnight.

In a speech at a virtual conference the Fed’s Powell was pessimistic about the prospects of a quick recovery. He said “The recovery may take some time…(which)…. can turn liquidity problems into solvency problems”. He called for further action from fiscal and monetary policymakers, but took negative interest rate settings off the agenda, spiting calls the previous day from President Trump to “accept the gift of negative rates”.

The recent rallies in global equity markets means the shape of any recovery is important. Only a quick economic spring back could justify the current strength of share prices.

Uncertainty around earnings is a key component. On current consensus estimates for the S&P 500, it is trading near all-time high valuations. If earnings rebound, this is justified. However if they stay in line with estimates, or fall further, there may be a sharp re-adjustment in stock prices.

That adjustment may have already begun. The 1.5% to 3% drop in major European and US indices pushed Asia Pacific futures lower in overnight trading. Australia and Hong Kong are looking at opening falls greater than 1%, although Japan and Singapore face more moderate selling pressure