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Japan’s Horrific GDP Spiral Poses Major U.S. Stock Market Threat

Last Updated September 23, 2020 1:35 PM
Francois Aure
Last Updated September 23, 2020 1:35 PM
  • Global economic headwinds are reaching critical levels after a horrific Japanese GDP figure on Sunday.
  • With China, Germany and Japan all slowing even before the coronavirus hit, recession risks continue to rise.
  • The great divergence between economic fundamentals and stock market returns continues as Dow Jones, S&P 500 and Nasdaq futures rose overnight.

The global economic outlook saw another dark storm-cloud brewing on Sunday evening as Japan, the world’s 3rd largest economy, reported an eye-watering GDP number of -6.3% YoY, considerably worse than the already dire prediction of -3.7%.

With China posting its worst housing data since 2018, the question is, how bad do things have to get before the U.S. stock market starts taking notice?

Japanese GDP Shock Fails to Dent U.S. Stock Market Futures

With the S&P 500, Dow Jones, and Nasdaq all rallying overnight, Wall Street continues to prove resilient to geopolitical threats.

Dow Jones, Stock Market, Japan GDP, Coronavirus
Dow futures rallied on Sunday night even as Japanese GDP collapsed. Source- Yahoo Finance 

As most U.S. economic data has been steadily slowing, it is consumer confidence that has proven to be the engine for growth. Seen as the world’s safe-haven stock market, investors appear confident that equities can continue to rise as the Federal Reserve pumps the market full of ample liquidity .

The Trump administration is only just admitting that the coronavirus will even impact U.S. GDP at all .

Despite this, even the most die-hard Dow bulls have to be getting a little nervous.

Starting with Japan and it’s horrendous GDP number on Sunday , we see one of the world’s largest economies utterly stagnating. What is most alarming is that there isn’t one drop of the inevitable coronavirus slowdown in that figure. Instead, a sales-tax hike and some extreme weather was the catalyst.

Hardly the strong showing you want from an economy heading into a major health epidemic. Unsurprisingly, Japan’s main stock market index, the Nikkei 225 dropped over 1% after the release but recovered on the unrealistic expectation that the Bank of Japan can increase stimulus in the economy .

Germany & China Were Already Slowing Before The Coronavirus

Moving over to the world’s second-largest economy, China’s house price data is the weakest since 2018. We are by no means seeing the full extent of the coronavirus impact yet, but an already vulnerable Chinese economy is showing its first signs of creaking.

Confirmed cases of the newly christened SARS-CoV-2, are now above 70,000 , and Beijing is doing its level best to get the economy bacl up and running.

Given rampant speculation about the validity of the statistics being supplied to U.S. health authorities, the outbreak remains a source of extreme uncertainty. Not that you would know it looking at the Dow Jones barrel it’s way towards 30,000 .

As if this wasn’t enough, the world’s second-largest economic area, the Eurozone is also turning down at precisely the wrong moment .

With the brewing storm of the coronavirus looming, export-reliant Germany, the economic engine of the region started slowing even before global trade ground to a halt.

Baltic Dry Index, Dow Jones, Stock Market, China Coronavirus

Wall Street Is All-In On China’s Coronavirus Stats

Analysts at Nordea markets provided the following take on why the stock market is taking such a relaxed approach to the global health crisis , as Wall Street continues to drink Beijing’s kool-aid,

Despite the new measurement method, it seems like Corona-fears have already peaked. As is often the case, momentum matters more than levels, why the big “Base effect from the new measurement method is NOT a game-changer for markets”. China clearly wants us to trust that the worst is already behind, and the market is softly buying into it.

With three of the most significant economic areas in the world already struggling before a major slowdown hits, a fully globalized U.S. stock market cannot keep running forever.

Wall Street has decided that the impact will only be temporary; this leaves risks undoubtedly skewed to the downside should that optimistic outlook start to crumble in the coming weeks.