Stock markets have begun the week on the front foot, apparently determined to jump on any good news concerning the fight against Coronavirus.

The FTSE 100 followed Asian markets in opening higher, jumping more than 2% in early trading this morning. The spark for the rally appears to be better news about the number of daily deaths in key hotspots in Italy, Spain and New York.

It is yet more evidence that investors are trying their hardest to look beyond the crisis to when some normality can return to economies.There is talk of potential ‘exit strategies’ from lockdown.

But is it all just wishful thinking? It’s hard to see how the economic prognosis has really changed this morning, or how it can change until two key questions have been answered.  

Firstly, what proportion of the population has already been infected? Knowing this would allow governments to plot an exit from lockdown, or at least have a better understanding of how long that might take. Those who have already been infected and recovered could return to work more quickly. If only a relatively few people have had it, an exit strategy may take longer.

This is where the UK Government’s plan to apply an ‘opinion poll’ of tests comes in. By testing a statistically representative selection of people from around the country, they will be able to estimate how wide the spread has been.

Secondly, what happens when societies in lockdown emerge back into the outside world? There have been a few examples of nations, such as South Korea and potentially Germany, successfully limiting infections and fatalities from an initial wave of the disease. The evidence on what happens when restrictions are lifted is less clear. 

Consensus opinion appears to be that subsequent waves of disease are inevitable, and their severity will depend in part on the answer to the previous question - if a large chunk of the population already has it, there will be reduced scope for them to be infected again. The impact of the second (or third, or forth) waves of Covid-19 will also depend on the systems we then have in place to track and trace new infections.

Clearly testing is now the key to our ability to recover, which is why so much emphasis is placed on testing in the coverage of the outbreak.

As the likely path becomes clear, markets will have more to base their decisions on and prices should settle on a clear direction. Until then, we can expect markets to bounce around within a range which is - relative to the crisis so far - limited.

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