With the drop in new coronavirus cases in China, stock markets are expected to rebound, though this will probably only be short lived, as pressure could await markets in the second quarter with the Federal Reserve’s plan to accelerate its liquidity reduction, according to Tisco Economic Strategy Unit (Tisco ESU).
Komsorn Prakobphol, the unit’s head, said signals for stock market recovery have been seen following the drop in new infections in China from 3,000-4,000 new virus cases per day in the first week of February to about 1,000 a day now.
He compared the situation to 2003, when a drop in new cases of the SARS virus saw stock markets rebound. Therefore, the drop in new infections of Covid-19 is a good sign for stock markets now.
Good economic indicators, ranging from December’s Chinese exports after the Phase 1 agreement to the US Manufacturing ISM Report, were helping to support market recovery, he added. Chinese exports turned to positive territory in December for the first time in five months, while the US ISM Manufacturing in January stayed at more than 50 points, reflecting manufacturing expansion for the first time since last July.
However, Tisco ESU estimatea this rebound could be short lived due to two risks that may pressure markets in the second quarter of this year.
One of these risks is related to Bernard Sanders, a Democrat candidate in the 2020 US presidential election. Were his popularity to continue to increase, this might put pressure on the stock markets as his policies were likely to weigh heavily on the performance of business earnings, Komsorn said. Examples of his policies are proposed increases in corporate income tax, personal income tax and tax on income derived from investment.
The other is that the Fed could reduce liquidity injections after seeing interest rates in money market returned to normal since January this year, reflecting ab easing in the liquidity crunch in US money market, he said.
Previously, stock markets have mainly driven by the Fed and other major central banks’ liquidity injections. In the fourth quarter of last year, stock markets worldwide spiked after the Fed’s liquidity injection. Now, stock markets are keeping an eye on when the Fed will withdraw this injection.
Another pressure point on the stock markets could be worse economic indicators for this month in countries hit hard by Covid-19 outbreak, Komsorn said.
Strategically, Tisco ESU urges investors to gradually take profits on stocks and adjust their investment portfolios to hold more cash in order to cope with risks that could pressure markets in the second quarter of this year.