We’re scouring academic literature to find any interesting angles on COVID. We’ve found two to note. One paper finds a relationship between the number of cases and stock market returns. It all hinges on how predictable the growth rate in cases is. Consequently, “unexpected” large increases in cases can have a very negative impact on stocks.
For the second paper, we try to understand better how COVID could impact inflation by dusting off an ECB paper from a few years ago. It looks at the relationship between natural disasters and inflation. There appears to be a fairly consistent increase in food inflation but decline in housing costs around disasters. So, the eventual impact on CPI depends on the weighting towards these – typically this means advanced economies see inflation fall, while EM countries see it rise. Take a read for more details.
Finally, for an update on how COVID is unfolding across DM, EM and each US state, take a look at our daily tracker.
This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
(total reading time: 2 mins)
We’re scouring academic literature to find interesting angles on COVID. We’ve found two to note. One paper finds a relationship between the number of cases and stock market returns. It all hinges on how predictable the growth rate in cases is. Consequently, “unexpected” large increases in cases can have a very negative impact on stocks.
For the second paper, we try to better understand how COVID could impact inflation by dusting off an ECB paper from a few years ago. It looks at the relationship between natural disasters and inflation. There appears to be a fairly consistent increase in food inflation but decline in housing costs around disasters. So, the eventual impact on CPI depends on the weighting towards these – typically this means advanced economies see inflation fall, while EM countries see it rise. Take a read for more details.
Finally, for an update on how COVID is unfolding across DM, EM and each US state, take a look at our daily tracker.
Enjoy!
Bilal
How Unanticipated COVID Cases Impact Stock Returns (4 min read) One of the most interesting recent academic papers on COVID is a new NBER paper on COVID (and SARS) case predictions and stock market returns. The essence of the paper is that “unanticipated” case increases lead to large stock market declines. For example, in the cases of the SARS outbreak, if the latest estimated cases was double the day earlier estimate, then the Hang Seng would fall between 8%-11%. And in the case of the current COVID outbreak, a similar doubling sees a 4%-10% decline in the Wilshire 5000 stock index for the US. The study is still ongoing and so updates are coming soon.
(Stefan Posea │ 8th April, 2020)
What Natural Disasters Can Tell Us About The Impact Of COVID On Inflation (4 min read) There’s been a number of recent papers on the impact of pandemics on economies. A Fed paper looks directly at pandemics going back to the 14th century and finds that they cause real interest rates to fall and wages to go up as a large portion of the labour force dies. A BIS paper models the likely impact of COVID on growth in coming quarters based on assumptions around which parts of the economy will shut down. However, there isn’t much work on the impact on inflation. We therefore delved into the academic literature and found a potentially relevant paper by the ECB on the impact of disasters on inflation…
(Bilal Hafeez │ 8th April, 2020)
Global COVID-19 Tracker: DM Countries Are Diverging There’s more chatter that we have passed the peak. Wuhan will be lifting restrictions on people movement today, so that will be an important test to see what happens to infections as suppression measures are eased. Looking at daily cases per capita across the developed world, we find that Spain, Switzerland and Australia have seen marked declines over the past week. Germany, Italy and Norway also saw…
(Bilal Hafeez │ 8th April, 2020)
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)