Sharp falls in Asian markets and US stock futures this week suggest investors are starting to catch up to the disconnect between the coronavirus’s widening impact and hopes of a V-shaped recovery. It’s a gap that has been particularly visible in metals. China, where much of the economy remains in lockdown, accounts for about half the world’s appetite for materials from iron ore to copper. That makes the sector highly vulnerable to a coronavirus-induced slowdown, and a helpful gauge of how well the reality of economic activity is being reflected in financial markets. The answer? Not enough. While some larger mills and smelters are working, disrupted transport and absent workers mean physical demand is in the doldrums. Domestic inventories of everything from steel to copper are high. Bloomberg Economics calculated last week that the world’s second-largest economy was running at 50-60% of capacity in the week ended Feb. 21. That is better than the week before and could well improve over the coming days. Still, it’s a level that seems hard to square with the way shares in miners such as BHP Group, Rio Tinto Group and others have been trading. Almost all major mining stocks bounced back after February lows, with BHP and peers falling below that only on Monday. They remain well above their troughs last year, when concerns over the US-China trade war rattled the market. Even copper futures on the London Metal Exchange, a reflection of confidence in the global economy rather than just physical demand, have rebounded. It’s not that investors are brushing off risk. There’s evidence of nervousness to be found in haven assets like gold, which last week broke through $1,600 an ounce. Yields on long-dated US Treasuries have tumbled. More pessimistic commentary is also emerging from company executives. Investors appear to have been betting on three things. First, that the virus will be contained in the coming weeks. Second, that Beijing will unleash hefty fiscal and monetary stimulus. Finally, that demand impacted by the virus will be deferred, and not simply lost. Unfortunately, none of these things is certain.  For metals and the resilient equity valuations of their producers, the coming days will be critical, as it becomes clear just how many workers emerge from quarantine and how much the Chinese government’s push to restart production is paying off. So far, the number of people on any form of transport is still a fraction of where it was a year ago, according to Bloomberg Economics. There are risks even if people do return. It’s much harder for face masks and hand sanitizer to offer protection in construction projects, which may well push back the start of the spring season, hurting steel and ingredients like iron ore. Domestic prices for steel used in manufacturing and building are still at their lowest in almost three years. BHP, which expects Chinese real GDP growth of around 6% for 2020, said last week that it would revise its forecasts lower if construction and manufacturing don’t return to normal in April. So how does that square with what equity investors are pricing in?  The hope for a hefty stimulus from Beijing, which underpins much of the equity market’s buoyancy for miners and beyond, seems broadly to match what China has already said and done. There is already monetary easing and other forms of support, from help with social security payments for small companies to busing in workers in some provinces. But it’s still unclear what shape the bulk of the fiscal stimulus will take and how heavy it can be in sectors such as property, where the government remains wary of bubbles. China is also well aware that splurging on debt to get the economy moving will mean pain in the not-too-distant future. That creates plenty of uncertainty. The other two assumptions are even more problematic. Whether China can contain the virus will be hard to tell for some time, not least given Beijing’s changes to the way cases are reported. It’s unclear what will happen once sealed-off areas begin to open, given epidemics can have more than one peak. Mass quarantines at this scale are also untested in the age of supply chains. Assuming everything bounces back swiftly is optimistic. The emergence of substantial clusters outside Hubei and indeed beyond China — in South Korea, Iran and Italy — is worrying. Then there’s demand for everything from washing machines to takeaway coffee and bigger-ticket items like cars, where sales have dropped 92% in the first half of February. It’s unclear how much will be pushed back. The underlying economic uncertainty is greater than during the severe acute respiratory syndrome outbreak in 2003, when growth rebounded quickly. That all makes mining stocks and the wider equity markets look a little lofty. During SARS, Hong Kong’s market fell almost a third from its 2002 high to the trough of 2003. This time, the Hang Seng Index, admittedly with different components, is down just 6% from its pre-virus 2020 high, as of Friday. It may all blow over. For now, the risks are to the downside. Bloomberg