Intraday Market Thoughts

The Problem with Trading Virus Stats

by Adam Button
Apr 7, 2020 23:20

The current routine in the markets is to trade around various coronavirus statistics, but there's an underlying flaw in that thinking. (More below). AUD was the top performer on Tuesday, while USD lagged. Ashraf posted the weekly Premium Video, highlighting why the 1929 analog for indices may no longer be working as a comparable model analog for indices. Is it 1987, 2008, or which is it? There's also a focus on FX and last night's trade. 

The S&P 500 suffered its worst intraday reversal since 2008 on Tuesday as it gave up a 3.5% gain to finish 0.2% lower. Even worse, the high was in the opening minutes and the low was at the close.

One of the reasons it fell was jump in deaths in the UK, New York and France, among other places. Another was a breakdown in oil. After trading higher for most of the day, crude crumbled by 9% in 90 minutes.

The virus numbers are obviously concerning from a human perspective, but daily infections and deaths aren't really telling us anything right now. We know it's a highly infections disease that's killing around 0.5-2% of those infected.

A number of places have proven it's possible to flatten the curve, including Italy which reported 3038 cases Tuesday, which is the lowest since March 13. From a human perspective, that's great news but it doesn't tell us anything about the economy and financial markets. The key question is: When can we reopen? Clearly that's after some flattening in the curve but if reopening leads to a fresh spike in infections then it's a blip at best.

The focus right now has to be on medical technology. The path to opening includes some combination of: 1) widespread infection testing 2) testing for antibodies to find out who has already been infected 3) Effective treatments to reduce symptoms/mortality.

A fund manager survey from BMO showed a median estimate on a broad US reopening at the end of May. Albeit possible, that will require major medical improvements. In the meantime, the virus stats are basically noise.

One market that is trading on fundamentals is oil. Thursdays' OPEC+ meeting is the major event of the week. The US is now trying to spin economically-driven cuts from US producers as participation and that might work. Up first is the weekly US inventory report at 1430 GMT on Wednesday. The consensus is for a 9 million barrel build, adding to last week's 13.8 million barrel climb in inventories.


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