Posted in: Market News
Published:
April 2, 2020 11:35 AM UTC

Dow Recoils as Labor Apocalypse Eclipses Europe’s Coronavirus Recovery

The European Covid-19 epicenters of Italy and Spain are emerging from the worst of the virus and cautiously looking at how to ease lockdowns. Will the US follow soon?
  • The Dow Jones Industrial Average (DJIA) struggled after apocalyptic unemployment statistics wiped out strong pre-market gains for U.S. stock futures.
  • Coronavirus cases continue to grow exponentially in the U.S. but Europe points to potential recovery.
  • Case numbers retreat in hard-hit Italy, Spain, and Germany with talk now moving to re-opening the economy.

The U.S. stock market struggled on Thursday after an apocalyptic jobless claims report reversed what looked to be a striking recovery for the Dow Jones Industrial Average (DJIA).

America is still ravaged by exponential growth in coronavirus cases, but there is hope in Europe. New Covid-19 cases have peaked and are now declining in the worst-hit nations of Italy, Spain and Germany.

Source: Bloomberg / John Hopkins University Center for Systems Science and Engineering.

Officials are now beginning to cautiously plan exit-strategies and analysts are plotting economic recovery models. Arnab Das from Invesco said we will ultimately see a ‘square-root-shaped recovery’ when the virus subsides.

I don’t think we should expect a kind of sustained, very rapid, very complete V-shaped bounce. I think what we should expect to see maybe is a bit more like a square-root where we have a V-shaped bounce back and things calm down, and gradually recover again.

Dow wobbles after jobless claims report pummels stock market

Wall Street looked set to snap two straight days of declines as U.S. stock futures rose more than 2% in overnight trading.

Then the Labor Department released its weekly jobless claims report, which showed that a record 6.6 million Americans had filed for unemployment insurance.

As of 9:56 am ET, the Dow had lost 140.35 points or 0.67% to drop to 20,803.16.

It looked like the Dow Jones would open to strong gains, but a brutal jobless claims report sucked the air out of the market. | Source: Yahoo Finance

The S&P 500 and Nasdaq fell 0.22% and 0.31%, respectively, though the Russell 2000 crept to gains of 0.15%.

Investors knew Thursday’s jobless claims report was going to be ugly, but hardly anyone expected it to be this ugly.

Last week’s jobless claims report was devastating. This week’s was even worse. | Source: CNBC

The Dow Jones economist estimate was 3.1 million, a slight decrease from last week’s historic 3.3 million claims. Goldman Sachs was considerably more bearish, forecasting 6 million claims, but even that undershot the mark.

Before the coronavirus outbreak, weekly jobless claims had never exceeded 695,000. Today’s print is 10 times as large as the financial crisis peak of 665,000.

Coronavirus cases decline in worst-hit regions

The Labor Department’s jobless claims report overshadowed genuine progress in Europe’s fight against Covid-19.

The worst appears to be over in the epicenter of Europe’s coronavirus outbreak. Italy and Spain have both reported sustained declines in the number of new cases over the last week. Pinar Keskinocak of the Georgia Institute of Technology said the numbers are promising.

It is encouraging to see the slowdown of the spread in some areas, thanks to strong measures, especially physical distancing.

Infection rates are also slowing in Germany, Netherlands, and Switzerland. As a whole, Europe will likely hit its peak in a matter of days, according to modelling by Global Macro Investor’s head of research Remi Tetot.

Although Italy has extended its lockdown, talks are now turning to safely re-opening the economy. However, that can only be done with widespread testing. Keskinocak explains:

[Nations must be] cautious about relaxing interventions in any area until rapid widespread testing is available, we have a better understanding of who is infected, and who has been infected and recovered.

Will the U.S. follow in Italy’s footsteps?

The decline in Italian cases brings hope to the U.S. which has always been a few weeks behind the European epicenter. Following the Italian trajectory means cases will continue to climb, but should peak soon. Richard Martinello at the Yale School of Medicine explains:

It seems like we’re following the same trajectory that we’ve seen in areas such as Italy. So here we’re anticipating that over the next number of weeks we’re going to see a substantial increase in the number of infected.

Remi Teto’s model would see New York cases peak around April 12th and then level off. After that, talks could centre around re-opening some parts of the economy. A discussion that would inject more optimism into the stock market.

What will the Dow Jones recovery look like?

With a possible end in sight, investors and analysts are scrambling to map out the stock market’s recovery. Arnab Das was confident that the brutal 30% plunge in U.S. indexes won’t descend into a 2008-style financial crisis.

The central banks are doing everything they can and it seems to be working to keep the financial markets and the financial system operating … We probably won’t have a financial crisis in a systemic sense like 2008/2009.

But we shouldn’t expect a quick bounce back to normality, he added. Social distancing measures are likely to be lifted in waves, so the stock market should reflect a more gradual recovery.

Eventually what we should have is a recovery. A bit of a bounce back as pent up demand is released. And then over time the economy normalised as a public health crisis comes to an end.

With additional reporting by Josiah Wilmoth

This article was edited by Samburaj Das.

Last modified: April 2, 2020 1:59 PM UTC

Ben Brown @_ben_brown

Ben is a journalist with a decade of experience covering financial markets. Based in London, UK, his writing has appeared in The Huffington Post and he was Chief Editor at Block Explorer, the world's longest-running source of Blockchain data. Reach him at benjamin-brown.uk or on Twitter at _Ben_Brown. Email ben @ benjamin-brown.uk.

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