Fear and sentiment

Posted by: Paul Donovan

03 Feb 2020
  • China's financial markets reopened after the extended holiday. Today's drop was expected. Policy measures may manage future declines. For the global economy, the virus raises five concerns.
  • 1) Fear is the biggest economic threat. Social media spreads fear and fake news. Google searches for "coronavirus" have risen, but Twitter is focused on the Superbowl (some kind of US sporting fixture). 2) China's demand for imports will fall. This has already happened for investment goods. Lower demand for oil is the new development. 3) Earnings of companies that produce in China, for China will be hurt. This matters to equities rather than the economy. 4) Global supply chains may be disrupted. Companies should have inventory, but if Chinese factories are closed long enough European and US production may suffer a lack of parts. 5) Global GDP averages will be hit by China's economic slowdown. This is a fairly meaningless number.
  • Manufacturing sentiment opinion polls are due. The risk with sentiment surveys is that people will answer with what they think they should say, following the lead of the media. For example, from 2018 US export orders sentiment collapsed. US exports did not collapse. Sentiment overreaction is an increasing risk in the coming months.

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