Financial markets reacted quickly overnight to the news that President Trump had tested positive for the novel coronavirus. At this point, we think that any impact on the economy can be measured through the financial channel, the confidence channel and through consumer spending, with a lag.
Look to the financial channel, the confidence channel and consumer spending.
Because we are still early in the news cycle, there is more that is unknown than known, and right now pricing action across financial markets is the only real metric to ascertain how the news may affect the economy heading into the end of the year.
It is clear that there is political risk, which is difficult to measure and is the Achilles Heel of financial markets. That risk will be organized around knowing when the president contracted the virus, and who else might have contracted it during interaction with him.
Should that create further policy uncertainty, then one should expect a period of asset volatility, which will create a modest negative wealth effect that will dampen spending in the current quarter.
During periods of crisis like the economic shock of this spring or even unexpected episodes such as this, there is a certain order of operations, or logic if you will, to ascertain the near-term impact on the economy. We tend to look at the following to make such judgments:
- Financial channel: Equity markets, foreign exchange markets, Treasury yields, commodity prices. If the crisis is serious then a look at dollar funding stress and various forms of credit stress.
- Confidence channel: Consumer, CEO, corporate.
- Spending channel: Consumer spending, with a lag.
Equity markets reacted quickly to the news overnight, with the Dow Jones and S&P 500 falling, which implies further downside risk across asset classes.
An early-morning cross-asset check shows that the U.S. dollar is down against six of the 10 major trading currencies and is trading at 1.17 against the euro and 1.29 against British sterling. At this point, there is no real evidence to suggest a strong and sustained risk aversion move across asset classes. Rather, the initial knee-jerk reaction may stimulate volatility in equity and FX markets that is likely to subside in the coming days.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.