Italy’s escalating coronavirus battle helped mark the onset of a global stock market collapse that erased $20 trillion in four weeks. Now, its campaign against the pandemic is being scrutinized for clues on how much further this once-in-a-generation crash will go.
While market players are being bombarded with support measures from central banks and the global stimulus pledge is $3 trillion and growing, the number that traders are playing close attention to is the Italian infection growth rate. Since the country was the first in Europe to implement lockdown measures, market participants are looking for clues on how effectively its peers can fight back.
The theory is that emergency stimulus is no cure for a public-health crisis, so asset allocation based on interest rates and bottom-up corporate analysis is on the backburner. Instead, people are trying to divine the market bottom by studying a nation whose death toll now surpasses that reported in China and they say the next few days are key.
“The situation in terms of infection peaking in Italy is not there yet but we are slowly getting to a point where we will finally get good news,” said Alberto Tocchio, chief investment officer at Colombo Wealth SA. “If other countries learn from Italy and apply strict lock-down rules, we should be over this emergency in a couple of months.”
Morgan Stanley’s Matthew Harrison says he now spends the “vast majority” of his time focusing on Covid-19 analysis, which he publishes every day. JPMorgan has also started issuing daily reports examining infection rates across Europe. JPMorgan says it’s paying particular attention to Italy, which it calls a “key measure” to track to get clarity around the peak of Covid-19. Once Italy shows a peak, the broker believes there will be confidence about the rest of the western world’s ability to manage outbreaks.
“We hope the social distancing measures introduced 10 days ago should start to bite early next week after 14 days,” JPMorgan analysts including Richard Vosser wrote Friday about Italy, adding that the brokerage expects the number of those who have recovered to help bring down the net increases in active cases in the coming days, while cautioning that “significant effects” are unlikely to be seen until the two-week mark.
The number of deaths in the country as of Friday climbed to 4,032 as total cases increased to 47,021. While the rate of confirmed diagnoses -- the data investors are keenly monitoring -- has shown signs of slowing, the fatality rate on Friday was at a record. The Chinese city of Wuhan, where the outbreak began, reported no new infections -- signaling the virus can be brought under control.
Of course, the reported number of new infections depends on how many tests are conducted. For weeks Italy has just tested people with symptoms so the real number of cases could be much higher than the official one, several studies show. In the last few days, some regions have started to do mass testing to its citizens
In a report this week, Christopher Wood, global head of equity strategy at Jefferies LLC, poured over European infection data including Italy as a fear gauge for international investors. Watch for an infections peak in France, Germany and Switzerland to see if a Western democracy can curb the spread of illness, Wood wrote in a note.
“Monitoring new infections has become a daily routine for us,” said Maximilian Kunkel, chief investment officer for Germany, at UBS Global Wealth Management in a phone interview. “If we see a peaking in new cases in Europe and the U.S., there will be a very quick turnaround in developed stock markets.”
Of course, there are other concerns for the market. For John Roe, head of multi-asset funds at Legal & General Investment Management, Italy is old news as protracted cross-asset volatility and global credit fears mark a new stage in the 2020 crash.
“We think this is now all about financial markets and volatility,” said Roe. “Central banks have to act to control volatility, forced unwinds and knock-on impacts. Only once the volatility is calmed can the market worry about Italy and the virus numbers.”
Monetary authorities are playing their part, with a slew of big measures announced by policy makers this week as they seek to combat the economic meltdown from the pandemic. It all helped stem the free-fall in European stocks, which posted their best two-day gain since 2016. But the gauge remains 32% below its February record high.
But for many investors, dissecting the outbreak data remains the critical trading signal.
“Expect the virus to be the fundamental market driver,” said Koon Chow, a London-based senior strategist at Union Bancaire Privee, in emailed comments. “A top-out in fear will come with a declining infection rate, and that is when markets can normalize.”
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