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WALL STREET INSIGHT

Stock market's massive rebound may not last amid dire economic slowdown, analysts warn

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A jobless American filling an application for unemployment benefits, one of 3.3 million seeking financial help as the US closes for business in an effort to slow the spread of Covid-19.

US AUTHORITIES have aimed their bazooka at the coronavirus-stricken economy, but last week's historic rally may fade in the coming days as investors discover whether conventional economic weapons work against an unpredictable virus.

US stocks bounced back last week, with the Dow Jones Industrial Average surging into bull-market territory as the US Congress passed a record-breaking US$2.2 trillion fiscal stimulus, and the Federal Reserve demonstrated that it would do everything in its expansive power to stabilise markets.

The scale of these efforts can hardly be overstated. Individual American households may receive US$3,400 or more, depending on the number of children.

The Fed is guaranteeing what amounts to an unlimited use of the "printing press" to calm fears in credit markets, and officials from the central bank say they stand ready to turn to new experiments should financial markets seize up again.

Yet, strategists warn that even these incredibly swift and far-reaching interventions may not be enough to offset the abrupt halt of practically all global economic activity.

Images of empty jumbo jets, of deserted landmarks like the canal banks of Venice, the casinos of Las Vegas and the theatres on Times Square cannot begin to capture the extent to which the global economy has shut down.

Corporate credit markets are indicating more nervousness about the viability of major corporations than at any time since the financial crisis more than 10 years ago. The outlook for small restaurants, boutique hotels and local stores is even more dire.

"Two other uncertainties facing investors (the length of the economic quarantine required to contain the virus and the ultimate economic damage) remain unresolved," said strategists at brokerage Barclays. "We believe medium-term risks are skewed to the downside after this rally."

Even if the US gets the public-health crisis under control, which remains uncertain, the economic crisis could persist. Even in China, where the medical emergency has abated, the economy is still not up to full steam.

Within the stimulus bill, there are winners and losers. Health-care companies were more or less flat, as anticipation of strain on the health-care system from the coronavirus pandemic offset the tens of billions of dollars committed to hospitals and insurance subsidies.

Airlines gave back some of their initial ground after reports that the US Treasury would take stakes in passenger carriers in return for the bailout, a punitive step that will dilute the market value of the companies.

Cruise lines, which are still dealing directly with coronavirus patients as ships carrying Covid-19 victims struggle to find ports of call, plummeted after the Senate version of the bill failed to include support for the industry.

Analysts are sceptical that the sustained rally last week meant that the wild swings in the stock market have come to an end: the CBOE volatility index, the stock market's "fear gauge", remains at its highest level since the financial crisis.

Whether it's high-frequency trading, which Quincy Krosby, chief market strategist at Prudential Financial, said appears to speed up markets to dizzying pace during volatile periods, or simply the digital speed of life, there's no question that stock-market trends move more quickly than ever before.

The Dow travelled from a record high to bear-market territory in record time, and its return into bull market territory from bear-market status (an increase of 20 per cent from a recent low) was completed last Thursday, scarcely two weeks after the bear market began.

There's now a debate over whether it's possible for the stock market to digest all of the dynamic implications of the coronavirus pandemic, or if the Dow's massive rebound is the ultimate head-fake rally.

The number of Americans applying for unemployment benefits spiked last week to 3.3 million. As many as one in four Americans may soon be seeking support as the US, now coping with the largest outbreak of any nation, effectively closes for business.

If, as US President Donald Trump indicated, the US economy is able to spring back to normal by mid-April, then the lows in mid-March could well turn out to be the nadir of the bear market, said Lorenzo Di Mattia, manager of hedge fund Sibilla Global Fund.

"Hard to believe this will be possible," said Mr Di Mattia. "It will be peak by then, the worst time to open."

The stock market has absorbed the fact that the economy will freeze for a month, but "I don't think it's pricing two months", he said.

"This week's historic stock market rebound seems to be more of a bear market rally than a confirmation that the bottom is in place," said Ed Moya, senior market analyst at foreign-exchange brokerage OANDA. "Coronavirus worries and messy fundamentals will likely see scepticism remain on everyone's mind."

One sign that bullish investors point to is the dollar. At the nadir of the coronavirus crash, a week ago, the dollar was the only thing that mattered. Investors sold stocks and bonds of all description, commodities of every form, bitcoin, even safe havens like gold and ultra-short term Treasuries - the only thing in demand was the dollar.

Conversely, the recent slide in the dollar, which saw its biggest retreat since March 2009 - the birth of the last bull market - was seen as a very positive sign.

It showed that the Fed's efforts to avert a financial crisis, if not a recession, were working. If financial conditions continue to improve, it could keep the bears at bay.

"We are looking to the dollar for signs of peaking because it may signal that the worst of the selling is over and that a tangible bottom is forming," said Jeff Schulze, investment strategist at Legg Mason affiliate ClearBridge Investments.

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