Market Overview

Comparing COVID-19 To The 2019 US-China Trade War

Share:
Comparing COVID-19 To The 2019 US-China Trade War

U.S. stocks have taken a beating in recent weeks on growing concerns about the negative economic impact of a global outbreak of the COVID-19 coronavirus. DataTrek Research co-founder Nicholas Colas compared the negative market impact of the coronavirus outbreak to the positive impact of January’s phase one trade deal between the U.S. and China.

“Think of the market action around COVID-19 as an unwind of the market’s Q4 2019 confidence about renewed global growth,” Colas said.

Rate Expectations

He pointed out that from early September 2019 to the beginning of 2020, the spread between 3-month and 10-year Treasuries increased from -0.51% to +0.37%. Unfortunately, coronavirus fears have inverted that spread once again, which is now down to -0.13%. Colas said the current spread is roughly the midpoint of the fourth-quarter 2019 range prior to the trade deal.

The futures market has also adjusted its interest rate expectations significantly in recent months. Prior to the trade deal, the market was pricing in a 1% to 1.25% fed funds target range for June 2020. By the end of the year, the market was pricing in no change to interest rates. Today, the futures market is pricing in an 87.6% chance of at least one rate cut by June and a 95.5% chance of a cut by the end of the year.

Dow Plummets 2K Points In 2 Days: Here's What The Pros Think

Growth Concerns

Colas said investors went from being concerned about global economic growth in 2020 due to the trade war to having expectations that growth would be fine once a phase one deal was reached. Investors are now back in doubt of the economic outlook due to the outbreak, however, and Colas said markets may not have fully reset just yet.

“If one assumes that the global economic effects of COVID-19 are a wash with the US and China signing a phase one trade deal (the cause of Q4’s global equity rally), then US large cap stocks still have 5% further downside since Q3 2019’s S&P 500 close was 2977,” he said.

Since the end of the third quarter of 2019, here’s a look at how some popular ETFs have performed overall:

  • SPDR S&P 500 ETF Trust (NYSE: SPY) is up 6.9%.
  • iShares MSCI Emerging Markets Indx (NYSE: EEM) is up 3%.
  • iShares FTSE/Xinhua China 25 Index (NYSE: FXI) is up 2.8%.

Benzinga’s Take

Obviously, the negative impact of the coronavirus will not perfectly offset the positive impact of the trade deal, and that’s not the point Colas is making. If anything, the strength of the market in the fourth quarter of 2019 and into February of 2020 is an indication of the type of rebound investors could potentially expect if the outbreak dies down or is contained at some point.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

 

Related Articles (SPY + DJIA)

View Comments and Join the Discussion!

Posted-In: coronavirusAnalyst Color Bonds Emerging Markets Futures Top Stories Markets Analyst Ratings Best of Benzinga

Latest Ratings

StockFirmActionPT
RIGRF LaffertyMaintains5.0
NOVRF LaffertyMaintains13.0
WSCDA DavidsonMaintains19.0
ITTDA DavidsonReiterates70.0
NOWGoldman SachsMaintains376.0
View the Latest Analytics Ratings
Don't Miss Any Updates!
News Directly in Your Inbox
Subscribe to:
Benzinga Premarket Activity
Get pre-market outlook, mid-day update and after-market roundup emails in your inbox.
Market in 5 Minutes
Everything you need to know about the market - quick & easy.
Daily Analyst Rating
A summary of each day’s top rating changes from sell-side analysts on the street.
Fintech Focus
A daily collection of all things fintech, interesting developments and market updates.
Thank You

Thank you for subscribing! If you have any questions feel free to call us at 1-877-440-ZING or email us at vipaccounts@benzinga.com