With no global uniformity in the way Coronavirus cases and deaths are reported and without wide scale testing, trading based on deviations in the numbers is very risky, reports Adam Button.
The current routine in the markets is to trade around various Coronavirus statistics, but there's an underlying flaw in that strategy.
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, a bad look that could be attributed to people overreacting to somewhat positive news on the spread of the virus.
One of the reasons it fell was a jump in deaths in the UK, New York and France, among other places. Another was a breakdown in crude 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 infectious disease that's killing around 0.5-2% of those infected. But without a uniform understanding of how numbers are collected, how many tests are being conducted and when they are shared and to who, models built on the day to day increase/decrease of Covid-19 cases and deaths may be faulty.
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 to get a fuller picture of the outstanding risk, 2) testing for antibodies to find out who has already been infected 3) Effective treatments to reduce symptoms and mortality.
A fund manager survey from BMO showed a median estimate on a broad U.S. 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 United States is now trying to spin economically-driven cuts from U.S. producers as participation. That might work, but the Saudis would want some verification and commitment beyond the U.S. producers’ breakeven level! Up first is the weekly U.S. inventory report on Wednesday. The consensus is for a 9 million barrel build, adding to last week's 13.8 million barrel climb in inventories.
Watch this space for a conversation with Ashraf on Trends in Yield Differentials
Adam Button is co-owner and managing director of ForexLive.com and a contributor at AshrafLaidi.com. You can see Ashraf’s daily analysis at www.AshrafLaidi.com and sign up for the Premium Insights. Ashraf's Tweet on indices here.
