Is the worst of the global market selloff over? Here’s an unlikely source for optimism

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Stocks staged a dramatic rebound worldwide as investors anticipated a major economic support package in the United States, and President Donald Trump pressed for the country to ease its widespread clampdown by Easter.

Canada’s S&P/TSX Composite Index rocketed 12 per cent higher on Tuesday, its biggest one-day gain in more than 40 years, a day after the index touched an eight-year low. The S&P 500 jumped 9.4 per cent for its biggest one-day gain since October, 2008. The Dow Jones Industrial Average rose 2,112.98 points, or 11.4 per cent, for its biggest gain since 1933.

Global markets have plunged over the past month as increasingly drastic measures taken to combat the coronavirus pandemic have hobbled the economy, triggered enormous job losses and pushed many businesses to the brink of bankruptcy. The U.S. is quickly becoming the focal point of the global outbreak.

U.S. lawmakers have been wrangling over terms of an economic lifeline, possibly worth as much as US$2-trillion, to support businesses and laid-off workers. Mr. Trump is eager to reopen the U.S. economy, despite concern among health professionals that a longer period of social-distancing measures is needed to slow the spread of the virus.

Some of the day’s biggest gains came from the hardest-hit sectors, which have the most to gain when the global economy recovers. Prices for shares of American Airlines Group Inc. rose 35.8 per cent, Boeing Co. rose 20.9 per cent and Ford Motor Co. rose 23.4 per cent.

Air Canada shares rose 19 per cent, Canadian Pacific Railway Ltd. rose 13.3 per cent and Manulife Financial Corp. was up 20.1 per cent in the biggest rally in Canada since 1979.

Previous one-day bounces during the violent stock market selloff of the past few weeks have failed to hold, leaving several major benchmarks at new lows as recently as Monday, when the TSX was down nearly 38 per cent from record highs in February.

But the idea that the worst of the global selloff may be over has support from an unlikely source: Italy.

Italy’s benchmark, the FTSE MIB, touched its lowest point in the current selloff nearly two weeks ago – an eternity given the furious pace of the downturn.

Recent stability in the Italian market is remarkable, given the onslaught of grim COVID-19 news. Since Italian stocks hit bottom on March 12, total confirmed cases have surged from 15,113 to 63,927, total deaths have risen from 1,016 to 6,077, and daily deaths have risen from 189 to a shocking high of 793 on March 21.

So why are investors feeling a little more upbeat?

Alberto Tocchio, chief investment officer at Colombo Wealth, a Switzerland-based wealth manager, sees two reasons.

One, the Italian government responded to the novel coronavirus outbreak with a total lockdown of the country on March 9 – the first developed economy to do so – and it may be working: The country has reported a smaller number of new infections for two days in a row and the rate of increase has slowed.

“We are moderately more bullish on Italian equities as we believe that Italy will be the first country, after China, to defeat the health emergency,” Mr. Tocchio said in an e-mail.

His second reason: The European Central Bank stepped in with a €750-billion rescue package that has reduced government bond yields. That’s good news for Italian banks, which hold a lot of government bonds on their balance sheets. It’s also good for utilities, which can gain access to cheaper debt.

The question is whether Italy is a template for the rest of the world.

Some observers have their doubts. John Christofilos, chief trading officer at AGF Investments Inc., said in an e-mail that China probably is a better barometer for global markets given its bigger size and global heft – and the signal from China’s stock market is not clear.

The Shanghai Composite Index rebounded impressively in February after a sharp selloff in January as the country made progress against COVID-19. But the index has since sold off again, hitting fresh lows on Monday before rising 2.3 per cent on Tuesday.

“We are still in the bottoming process in my opinion, and it could take several weeks to complete. [Investors should] try to avoid ‘head fakes’ as we will be whipsawed for some time,” Mr. Christofilos said.

But if the fight against COVID-19 is driving investor sentiment, then Italy’s battle may give sentiment a much-needed boost.

Matteo Ramenghi, chief investment officer for Italy at UBS Global Wealth Management, pointed to Italy’s slowing pace of new cases as an encouraging development for other countries.

"It is too early to call the peak [of the outbreak], but at least this is a light at the end of the tunnel. It seems the measures are working. This should also offer a positive read-through for the rest of Europe where similar measures were taken, albeit more recently,” Mr. Ramenghi said in an e-mail.

Mr. Tocchio said he expects other countries to adopt the Italian lockdown model (India did so on Tuesday), “with the global market set to recover as soon as there are signs of infection inflections worldwide.”