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U.S. stock market may see relief rally after worst week since 2008

(Xinhua)    11:05, March 22, 2020

The U.S. stock market is expected to see near-term strength after entering a bear market and seeing the worst weekly performance since a sharp drop in 2008, according to multiple market watchers.

The deep plunge of U.S. stock markets triggered circuit breaker and suspension of trading twice last week. Meanwhile, the Dow Jones Industrial Average Index, S&P 500 Index and Nasdaq Composite Index lost 17.3 percent, 14.98 percent and 12.64 percent, respectively, marking the deepest weekly fall since 2008.

The combination of extremely oversold conditions and announcement of massive policy stimulus packages should help provide some support to global equity markets, said Phillip Colmar, managing partner on global strategy with MRB Partners, on Saturday.

Colmar told Xinhua that global equity markets are likely to be put in at least a near-term low, even if not the ultimate bottom.

"After recommending being short equities, we are now looking for a near-term bounce and reduction in implied volatility in the coming days," said Colmar.

The S&P Index would see a relief rally to 2750 points by April 30, representing a 19.3-percent growth from the closing on Friday, according to a research note by Barry Bannister, managing director and head of institutional equity strategy with U.S. equity research team of investment bank Stifel.

The ratio of defensive stocks to cyclical ones and the multiples of gold divided by Brent crude oil price appear to have peaked in recent days and the two measures are reliable for forecasting lows of S&P 500 Index, according to Bannister.

The selling pressure in global equities has been extreme, with the pace of the decline in stock prices only matched by a couple of periods in history, said Colmar.

Colmar added that equities have swung from cyclical overbought readings to oversold extremes in a month, while implied equity volatility has spiked to levels last seen during the depth of the 2008 crash.

"The past month was the most rapid decline from the recent price peak for most global stock indices in over 100 years, which is fitting for a pandemic or epidemic that similarly creates a short, sharp shock for global economic activity," Bannister told Xinhua on Saturday.

"With such massive stimulus in place, and likely more to come, the upward turn in markets, when it comes, could be violent," said a research note by United Bank of Switzerland (UBS) AG, on Thursday.

By summer 2020, COVID-19 should be peaking as hot and humid weather returns to the northern latitudes, enabling a similarly rapid recovery later in 2020 and into 2021, said Bannister.

Still, in the absence of credible signs that infections in the Western world can be controlled, volatility is likely to remain elevated, the UBS said.

Colmar said that a durable floor and subsequent sustained up-leg in global stocks will await more encouraging developments in terms of the health crisis and ability of those countries that recover early to restart their economies.

"While equities are due for some near-term strength, there should be ample time for investors to wait until some of the clouds start to clear before making major bets," said Colmar.

The markets would focus on whether central banks are moving quickly to get in front of the dislocations in financial markets and ensuring the liquidity necessary to meet the deleveraging as well as on whether fiscal policymakers can deploy necessary tools to mitigate job losses and bankruptcies from rising infection counts and shutdowns, according to the UBS.

Stifel expects weak performance of S&P 500 Index in the 2020s resulting from lagging valuation of growth stocks.

"If the S&P 500 Index actually does reach a price of over 3000 points within 2020 or thereabouts, we may conclude it is time to lighten positions," said the note by Stifel.

(For the latest China news, Please follow People's Daily on Twitter and Facebook)(Web editor: Kou Jie, Bianji)

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