Did the corona-driven equity market end?
Stock markets across the globe rebounded Tuesday on the Fed’s unlimited QE plan and anticipation of the US $2 trillion fiscal stimulus package. Dow Jones surged 11.36%, the biggest daily advance since 1933.
With unlimited bond purchasing plans and multiple monetary tools aiming to support the credit market and affected companies, the Fed is going to be the lender of last resort. The dollar squeeze eased on Tuesday and we have seen a strong rally in the equity.
Despite the improved risk appetite, it’s too early to predict a V-shape or U-shape recovery of the coronavirus-driven markets.
The coronavirus (COVID-19) remains a huge uncertainty. Confirmed cases in the US have surged above 54,000 with 775 deaths, bringing the US to the third hardest-hit country following China and Italy. Given the accelerating pace of testing, more cases are expected to be reported, especially in New York, a metropolitan with a large gap between the rich and poor. The coronavirus outbreak will continue to limit the market’s optimism.
The virus will have a significant impact on earning outlook and GDP growth. With more states and cities heading into lockdown, the US economic activity is halting. US Markit Service PMI in March prints at a record low of 39.1, confirming the collapse in the service sector that accounts for 70% of the US economy. The hotel, travel agency, hospitality, and retail industries have laid off thousands and even millions of staff in order to survive the risk.
This week’s jobless claim is forecasted to reach 1.5 million. Federal Reserve Bank of St. Louis President James Bullard has predicted the U.S. unemployment rate may hit 30% in the second quarter, along with a 50% drop in GDP growth.
So it’s not hard to understand why Trump has urged business to reopen by Easter, 12 April despite acknowledging the negative impact.
History may be the guide. After the Fed announced the QE1 in November 2008 during the global financial crisis, Dow Jones (US30) continued its decline until March 2009 to find the bottom. It has been only two weeks since the Fed initiated the $700 billion QE on March 15, which has been elevated to unlimited on Monday.
It's reasonable to see a short covering rally boosted by the looming $2 trillion fiscal stimulus package. The oversold RSI index also requires a correction.
However, it takes time for these massive monetary and fiscal policies to effectively work on the real economy. The coronavirus panic will continue to dominate market sentiment until we see a flattening virus curve. The risk is skewed to the downside, with the Monday low of 18184 offering support.
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