How Markets React To Coronavirus And What To Prepare For Next?
The head of World Health Organization announced that the world is now dealing with the coronavirus pandemic, but he note that for the first time in history, the development of the pandemic has been contained. The number of cases of COVID-19 virus in Italy has grown another 25% per day and exceeded 800 000 people. In this regard, previously introduced restrictive measures in certain regions are distributed throughout the country. The number of cases outside of China continues to grow at an exponential rate and has already exceeded 32.5 thousand people. The epidemic also did not go pass the US, so many are very interested in how markets react to coronavirus.
Alarming fears that the rapidly spreading coronavirus will destroy global supply chains and lead the economy into recession are capturing investors. On Wall Street, passions raged for three days, the Dow Jones Industrial Average index showed a magnitude of 1000 points or more. The US stock market on March 9 showed the worst drop since 2008 amid oil collapse and persisting concerns about the negative economic impact of coronavirus. S & P500 at the end of the session fell by 7.6%, to 2747 points. The energy sector lost 20% due to a drop in WTI crude oil prices by 27%.
Yesterday’s stock rebound followed Monday’s most powerful drawdown of indices since the crisis times of 2008. The external background for the American session was mixed: European markets showed mostly negative dynamics, while Asian ones finished in positive territory, Asian indices are recovering some of the losses after falling the day before.
In response to what is happening, the US monetary and fiscal authorities announced that they are developing a plan to support the economy. The Fed is expected to cut rates immediately by 0.75% at the March 18 meeting. President Donald Trump said he plans to discuss with the Senate a radical fiscal stimulus in the form of lower payroll taxes and to help sectors that have been hit hardest by the virus, namely air carriers, cruise operators and the hotel industry. Investors are waiting for more information on the stimulus package that will provide the necessary support to the US economy.
Potential Recession Indicators
In the face of uncertainty at the beginning of 2020, many investors are trying to determine how markets react to coronavirus and whether to prepare for the worst. Bank of America has published a list of possible recession indicators developed by its experts to monitor markets and economies:
- Decline in consumer sentiment in the United States
US consumer is an indicator of the duration of a global economic downturn. Conference Board consumer confidence index showed values less than expected 132.6 against the background of the controversial situation with the spread of coronavirus. In general, a strong consumer is central to the US economy, which is experiencing the effects of a trade war with China and another health crisis.
- The fall in the small businesses confidence level below 100
A fall in The NFIB Small Business Optimism Index is usually a sign of a slowdown in the economy. Currently, the index is at 104.3. If the optimism index for small businesses NFIB drops below 100, this may indicate a recession.
- Low mortgage activity
Another important indicator is mortgage activity. With a decrease in mortgage applications, the economy gets a negative impact. To track the decline in mortgage purchase activity, analysts use the Mortgage Bankers Association Purchase index.
- The number of applications for unemployment benefits is above 250,000
Bank of America estimates that when the number of applications for unemployment benefits exceeds 250,000, this may mean that a recession is occurring. Last Thursday, the US Department of Labor announced that the number of Americans applying for unemployment benefits last week fell by 3,000, seasonally adjusted to 216,000 people.
That is, despite the outbreak of coronavirus, the data confirm that the labor market is in good condition. In February, the US economy added 273,000 jobs, exceeding expectations for 175,000 new jobs last month. The unemployment rate also fell to 3.5%, reaching the lowest level in 50 years.
- Assessment of the likelihood of re-election of President Trump
Bank of America believes that reducing the likelihood that President Donald Trump will be re-elected may lead to a drop in markets. Analysts use Oddschecker.com indicators to monitor, demonstrating that the likelihood of re-election of the current president fell to 58% from 62% on February 20. On Wall Street, they believe that although Biden, whose rating has grown significantly, will not cause harm, Trump is more optimistic about stocks and the economy.
US market confidently recovering from collapse
To understand how markets react to coronavirus, you need to look at global stock exchanges, where high volatility remains against the backdrop of the collapse of the oil market and the continuing risks of the spread of coronavirus. So the Japanese Nikkei is adding 0.9%, the Chinese Shanghai Shenzhen CSI 300 against the background of the visit of Chinese President Xi Jinping to Wuhan is growing by 2.1%, the Hong Kong Hang Seng increased by 1.5%. European stock markets in the first hours of trading are growing by 2.5-3%.
The American stock market yesterday did not immediately determine the direction and went into the red before finally consolidating in the black. The creep in quotes for growth on US exchanges has been encouraged by the hope that the White House will develop and promote economic measures in Congress to overcome the situation with COVID-19.
In turn, congressmen from both parties expressed skepticism about the tax cuts announced by Trump, but the investment community does not lose hope of incentive fiscal policies in the United States.
On Tuesday, March 10, the United States stock market ended the trading session with a steady increase in major indices. Standard & Poor’s 500 wide market index increased 135.67 points or 4.94%.
Demand for safe assets remains. US bonds are getting more expensive. The 10-year treasury rate remains below 0.7%. Brent crude oil after the collapse the day before is growing by 5%, to $ 36 per barrel. The price of gold is reduced to $ 1,660. Thus, risk appetite today shows the first signs of recovery, but remains weak.
At the end of the session, the Dow Jones Industrial Average blue chip indicator increased by 1167.14 points or 4.89%, the high-tech industries index Nasdaq Composite went up by 393.58 points or 4.95%, and the S&P 500 recovered during the upcoming trading above the previous local minimum of 2855 points.
As part of the blue chip index, every single paper closed in positive territory. Over 6% of the shares of Tesla, JPMorgan, Apple (NASDAQ: AAPL), Visa (NYSE: V), Home Depot (NYSE: HD) and others increased.
A dynamic rebound at Tuesday’s trading was undertaken by many oil companies, who lost significant parts of market capitalization at the start of the week – Marathon Oil shares added 21.2%, Apache – closed up 13%. Shares of Occidental Petroleum (NYSE: OXY) jumped 14.6% after it announced it would cut quarterly dividends and cut its capital investment plan due to falling oil prices. Cruise operators also made big gains amid Trump’s promises – Carnival shares rose 10.5%, Royal Caribbean Cruises – 7%.
In New York these days, the FinTech Forum, organized by Wolfe Research. The forum program includes presentations, talks and meetings on the development of digital and multi-channel payments, electronic and mobile commerce, B2B, blockchain and other new technologies, security payments. Attendees will be Visa and Mastercard.
Nevertheless, Freedom Finance’s sentiment index remains under pressure at 8 out of 100, which is in line with 2008 levels and reflects concerns about the negative economic impact of the coronavirus epidemic.
Goldman Sachs expects further market decline
It is difficult to predict how markets react to coronavirus here and now, but specialized reputable companies in the world of finance make their expert forecasts. Goldman Sachs said that the bull market for the S&P 500, the longest in history, is likely to end soon, according to Reuters. The bank predicts a 28% drop compared with the February peak, as the rapidly spreading coronavirus is likely to affect corporate profits.
Goldman Sachs expects the S&P 500 to reach 2,450 points, 15% below current levels by the middle of the year, after which a rebound of up to 3,200 points will occur in the fourth quarter. The main points of change in the assessment regarding the reduction of earnings per share are, in particular, lower oil prices and lower interest rates, which reduce the profit of energy and financial companies.
Experts suggest that business activity outside these sectors is also likely to be weaker, as evidenced by lowering or canceling forecasts of some companies in recent weeks.