By Tobias Adrian, Financial Counsellor and Director of the IMF's Monetary and Capital Markets Department, and Fabio Natalucci, Deputy Director of the Monetary and Capital Markets Department
Amid the human tragedy and economic recession caused by the COVID-19 pandemic, the recent surge in risk appetite in financial markets has caught analysts' attention. After sharp declines in February and March, equity markets have rallied back, in some cases to close to their January levels, while credit spreads have narrowed significantly, even for riskier investments. This has created an apparent disconnect between financial markets and economic prospects.