Since the start of the market sell-off in late February, the Dow Jones index dropped by around 23%, while the Shanghai Stock Exchange (SSE) Composite Index and Hang Seng Index declined by 8% and 14% respectively. We see that both US and Asian markets differ vastly in terms of market movements and drivers behind the market direction. Most recently, despite surging unemployment rate, the US market had a 3-day rally (rising by 20%) on the back of a $2 trillion economic recovery plan. However, Asian markets did not take on the lead of the US markets and instead reversed its upward direction to end up 5%, 0.7% and 0.6% lower for the Nikkei 225 Index, Hang Seng Index and SSE Index respectively.
This ongoing pattern provides us with a new perspective on the Asian and US market. The accelerating outbreak of Coronavirus in European countries (Italy, France, Spain and Germany) as well as the US mirrors the initial/mid stage of the virus outbreak in China back in early February. However, since then China has contained the spread to a large degree and it seems like they are on track to a full recovery. Shopping malls are operating as before, restaurants return to business as usual and the daily activities of an average person is more or less unaffected by any remnants of the virus outbreak. With the country coming alive again, the domestic demand remains at a sustainable level. In major manufacturing cities in China, a large number of factories are reopening, with the supply chain generally recovering well.
The problem however, arises with international demand as we observe an increase in lockdowns and travel bans across the world (especially with Europe and the US). China factories are at risk now of facing cancellation of international orders due to a declining demand outside of China. The depreciation of major currencies, exponentially rising number of infected cases in the US and Europe as well as the lack of medical resources in certain countries seems to be the main driver behind this. The contraction of supply chain in the US and Europe is also likely to follow from factory closures and production line slowing down. This is a unique situation where the rest of the world is catching up to China’s economic recovery, but China is unable to move forward with other countries’ drop in demand. From this, more unconventional trading or investing strategies will potentially arise as investors try to hedge off the risk of one country with another.
In the past, when there is a global crisis, the global economy would likely move in the same direction with the US generally leading it. However, in the midst of this Coronavirus pandemic, we observe completely different patterns (whether its supply, demand, policies or economic health) between the US and Asian countries.
At the moment, China is the leading indicator of global supply strength and the rest of the world determines the health of international demand. When the virus outbreak eventually subsides, the recovery of manufacturing and factory activities outside of China will most likely be slow, which results in an increased reliance on China for international supply. This means that the growth of China and other Asian countries could possibly dictate the recovery rate of the global economy when the Coronavirus issue has stabilized.
Blog article written by Miranda Bai, Research Analyst, Maqro Capital