Before & After

This is Before and After from Refinitiv. I'm your host, Johanna Botta. Due to the Coronavirus pandemic we're filming this episode in unique circumstances. So the look and feel will be slightly different, but the content itself will remain of the highest quality thanks to the very latest Refinitiv data. Now we know this information is more important than ever, so please bear with us during this difficult time while we continue to bring you the show twice a week. 

On Monday, March 23rd at 7pm New York time, the market closed a new low, down nearly 40% in a month. Then President Trump gave his nightly press conference and said something that caught the attention of traders and investors around the world, Trump said; "At some point, we're going to open up our country and it will be fairly soon." He then said he was looking at 'weeks rather than months'. In saying this he might just have sparked a rally in the S&P, which was up more than 14% through Thursday. And though the US lockdown has now extended, the President possibly, perhaps shifted the narrative ever so slightly by asking the question, "At what point is a cure worse than the disease?" Well, we're not here to answer that question, one that's loaded with moral hazard, an area we're not in a position to discuss. But we can examine a few scenarios and anticipate the possible effects on the broader economy, markets and society. All, of course, through the prism of economics. Markets are said to hate uncertainty, and Covid-19 has posed perhaps the most existential dilemma in our lifetimes. Our economies and markets are all set up to function on the premise that people can move around without restriction and interact freely with one another. With so much of the economy dependent on services that require this free interaction, it's no wonder we saw the quickest decline from highs to Bear Market territory in history. In response, the government introduced significant fiscal stimulus, while the FED acted almost immediately to cut rates and make big and incredibly bold asset purchases. But the market made zero effort to move to the upside, and the selling simply cascaded. But now has a hope of a return to even slightly normal activity, however far off, big enough to justify the recent market relief? Or is it really just that investors dread the irreversible harm of a prolonged economic shutdown? The worst case scenario. How much pain can market partisipant's take? After just two weeks of strictly enforced shutdown in the US, the carnage has already been massive. The week that ended March 21st, 3.28 million Americans filed for unemployment. That was quadruple the previous record, and that's after two weeks of shutdown. What would happen after four months? What would be left of the system to stimulate? Perhaps this is why we've seen so much focus on a tangible target. The flattening curve of new cases as a concrete goal that could mean the economy can reopen. Certainly the long term consequences of a shutdown could include knock on health effects. Don't forget society at large benefits from the overall prosperity of the state, and there's a clear connection between economic well-being and life expectancy. Could, for instance, a repeat of the Great Depression reduce the country's average life expectancy? 

Many people don't believe the numbers. But has China bounced? Should investors start to think about the longevity of the virus in this equation? Will it last for a week, a month, a quarter? And how much of the accompanying weakness is already priced in? Coronavirus continues to rampage around the world, with hundreds of millions of us right now in lockdown. But China could offer the first sneak peek at the virus as a full cycle and consequences for our national economy. This week, China will report its manufacturing PMI. Last month was the lowest ever level at 35.7. Investors will be curious to see if those famous last words, "It can't go any lower" will prove accurate. Of course, Chinese authorities have already claimed victory over Covid-19 after posting hardly any new cases or deaths. This week's data is particularly interesting since we know that factories there restarted production in March. And so it's not unreasonable to expect a big bounce back into the 50s to show expansion out of the recent abyss. Remember that a number above 50 shows that the economy is growing, but it's also important to remember that the rest of the world shut down in March, and that could dampen a quick bounce back. A strong and swift jump in the PMI number might be a ray of hope for developed economies that are currently under lockdown. It might also offer ammunition for that crowd of people we've already discussed who are demanding that the U.S. economy reopen sooner rather than later. Now Shanghai's stock market has been one of the most resilient in the world. It's only dropped 11% since the virus spread through Hubei last month when the PMI number came in at 35.7. Shanghai traded up 3% to 2970 and almost recouped the entire selloff. Since then, the index has fallen 7%. We also saw a big plunge of the S&P after that shockingly bad payrolls number. But in a sense, that was no major surprise. We are dealing with an unprecedented time in modern history. So it's difficult to predict with any confidence whether the PMI will bounce back or not. It's even harder to know how the markets will react in a period of such extreme volatility. The best we can do is try to extrapolate some clues from a country and market that might just be showing us our own future. 

Well, it looks like some of you, bought bank stocks last week! They're up 9%, which is not too shabby, but it's not exactly the best performing sector either in a week where global markets rallied double digits. If we look at the 50% retracement level, you could have more upside on the Euro STOXX Bank Index to 3075. In percentage terms that kind of move higher is about the same as a downside move required to hit new lows. That makes it a 50/50 ball if you want to place your bets. 

So there it is. U.S. shut down and China Manufacturing PMI in the Before. Bank stocks in the After. Refinitiv data throughout. This has been the Tuesday episode of Before and After, please subscribe and hit the notification bell to ensure you're alerted to all of Refinitiv's future market updates. We look forward to seeing you again on Friday.

Coming soon