Mapping Fear onto Markets | The Corona Correction | Refinitiv
Roger: Welcome to the Corona Correction Series in association with Refinitiv, I'm your host Roger Hirst. Richard Peterson of MarketPsych site Refinitiv analyzes trends in global media, including trends in sentiment. They've been studying the current Coronavirus outbreak and comparing it to previous incidents. I asked Richard to outline the current trends. Richard Peterson: So I'm Richard Peterson. I'm the CEO of MarketPsych, where we do text analytics on news and social media to try to understand global trends and patterns, especially in the financial industry, but also in geopolitics. We're looking at references to human infectious diseases in various countries, both today and in the past for past epidemics. And trying to understand, are there patterns in the ways that these references appear in the media, and then subsequently financial market prices move, like the recent big sell-offs in stock markets. Are those related in some way to the frequency of infectious disease or the amount of fear in the content in the media? So if we go back to 2003, there was also a multi-month period where markets were declining on this fear, largely in the regions. So you saw big hits to Cathay Pacific. And so we see that with Cathay Pacific falling as the infectious diseases are more widely discussed and as fear rises. Though, we also saw that the references to disease tend to continue throughout the remainder of the outbreak. But what we find is a good timing tool to predict when the recovery will happen is when fear starts to decline. So when fear in the Hong Kong media starts to fall, that generally indicates that we've hit the bottom. Roger: Are there any signs we've seen the peak fear in China? Richard Peterson: It does look like we've hit peak fear in China and Hong Kong as well. So we do see that those are falling and have been falling for several weeks. So that was surprising to us. We thought originally maybe that occurred because of the strong liquidity injections in China, but nonetheless, they've certainly hit peak fear already and sentiment is improving so people are becoming more positive about the economie's there, from a very low point, of course. In the United States and in Japan we also are seeing fear continuing to rise. South Korea, we see a turnaround as well, so we do see that fear has started to fall in South Korea. So it depends on the region, and I think the level of containment of the outbreak as to where where the fear levels are. Roger: What is the sort of timeframe, because, you know, you say we didn't like we've hit peak fear in Europe or the U.S. It's something which plays out over a month, two weeks, six months? Richard Peterson: When we look at other assets, for example, crude oil, there's there's actually quite often shocks to crude oil, as we saw recently. So we can then go back with crude oil over 20 years and look at what creates fear in crude oil and how long does it last? So with something like crude oil, we see that a one week shock will reverberate for at least a month. And usually with our data, we see that's a one week shock, well, it takes about three weeks, three times the duration to price it into the markets. And a one week shock can be anything like an increase in the number of cases or an increase in the uncertainty. Once the bad news stops and fear starts to decline even just a little bit, then you will see a rebound. So give it a week of decline and then the rebound will likely, we'll have more confidence. And there do tend to be zigzags on the way down. So we may see a bounce after Monday's big decline. We may see some bounce this week, maybe for four days through the end of the week, but it'll roll over again if by the weekend there's more and more communities shut in the United States. Roger: So as you can see, during previous infectious outbreaks, the peak in fear occurred well in advance of the peak in infections. And markets usually start to turn soon after the peak in fear. For China, it already looks like the peak in fear has been reached, and this may help explain some of the recent outperformance. Though huge liquidity injections have certainly helped. Europe & the U.S. are still to reach peak fear. Also, we may now have to factor in the additional uncertainty of a potential recession. If a recession is now on the cards, the markets are still early in the correction phase, even if the correction due to fear of Coronavirus is now on its way to completion. We'll see you tomorrow with another update.