The hidden markets data giving us a new view of the corona crisis

I and other veterans of the financial markets have never been through anything like this crisis. The speed at which markets have fallen; the unprecedented volatility; the way it has ripped through previously untouchable safe havens; the unfamiliar work pattern it has imposed on us all.

As one of the biggest global providers of pricing data to the markets, I’ve been astounded by the volume of data Refinitiv customers have been consuming from their remote offices (aka home). To give you a sense, in late February we saw user demand for our data increase to double our previous record (set just after Britain’s EU referendum in June 2016).

But perhaps even more revealing than volumes has been the type of data clients are pulling down from our servers as well as the relative increases and decreases in popularity of those datasets.

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I’m talking with globalisation expert Professor Ian Goldin and economist Dr John Llewellyn on the lasting legacy of coronavirus to our economies, markets and the international order this Thursday. Register here to watch https://refini.tv/2UNyYOJ

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Taken together our data behind the data starts to reveal a fascinating picture and some new stories of what’s on investors’ minds; where the global economy might be pointing; and markets will never operate in the same way again.

Here are four insights that cast a fresh light on the situation:

1.     Anxiety on mortgage debt is rising even faster than corporate credit

Demand for everything is up massively. But the dataset that’s particularly caught my attention is the jump in demand for information on Mortgage Backed Securities. It increased almost eightfold compared to November and December 2019.

That’s perhaps not a surprise given the underlying drivers. Far more households are likely to default on their monthly repayments with unemployment spiking in many countries – most seriously in the United States. Investors are growing more anxious about their exposure to MBS in an echo of the 2008 Global Financial Crisis.

What’s more revealing is that demand for this dataset outstripped demand for information on company fundamentals … including corporate debt. Is it possible that, for all the media focus on the vulnerability of the highly leveraged corporate sector, investors’ more immediate concern is what’s happening at the household level?

Image 1: The new COVID-19: Macro Vitals on Eikon

2.     Live shipping data shows an economy in the doldrums

Shipping – including indicators such as Baltic Exchange Dry Index – has long been a lead indicator of global economic dynamism. Understanding who’s carrying what, where, for whom and in what quantities can supplement, and on occasion front run, other indicators such as industrial output and PMI reports.

China’s position in this picture is critical: not only as ‘the world’s factory’ and a vast domestic market in its own right, but it’s also the focus of our hopes around coronavirus. Put simply, if China can bounce back quickly (having been through the worst of the disease) then prospects for the entire world economy start to look a bit brighter. It will mean that, once demand starts to recover in Europe, the US and elsewhere, China will be able to step its production again – and hence its imports (and thereby the engine that is world trade).

The data within our Shipping App (see image 2) is therefore particularly relevant … though not particularly encouraging thus far. By zooming on the live map towards Singapore it’s evident that clustered to its east sit an unusually large number giant Capesize bulk carriers (denoted as a green square). They are called ‘Capesize’ because they are so big they have to sail around the Cape of Good Hope or Cape Horn rather than through the Suez or Panama Canals. Our data shows them sitting idle and empty.

As for oil, it’s a sign of just how far demand has dropped that more crude is being stored at sea than at any time since 2009. Commodity traders are scrambling to charter every VLCC or very large crude carrier they can in the hope that prices soon rise from prices we haven’t seen since 2002, and make a profit on the difference.

Image 2: Capesize Bulk Carriers (circled in red) anchored near Singapore on 30 March, 2020

In healthy economic times these vessels would typically be bound for South Africa, Brazil or Australia where they would load up with coal or iron ore before turning northwards to China. So until those little green squares start moving again, we will need to temper our enthusiasm as far as the global economy is concerned.

3.     The first alt data crisis?

In the 11 years since last entering bear market territory, we’ve seen huge changes in the types of data used by both the buy side, and increasingly, the sell side.

Traditional ‘fundamentals’ data – whether that be company earnings, analyst estimates or official economic data – continue to set the agenda and we have seen customer demand for the latter surging over the past couple of months.

But this crisis is perhaps the first time that alternative data has played such a key role in moving markets – from transport passenger flow, to satellite imagery of industrial activity, to card usage. Analysts and investors are even looking at a country’s stock of ventilators and ICU beds to gauge how quickly it will recover economically. They are searching for something – anything – to give them an indication and an edge in forecasting supply, demand and economic activity in near-real time.

For a decade this advantage has been held mostly by a small subset of investors like quant hedge funds. Now, this position of exclusivity has started to crumble. Alt data is increasingly moving into the mainstream as larger data providers, like Refinitiv, start to collect, verify and make available these datasets to hundreds of thousands of investors, analysts and data scientists. It’s exactly what was behind our investment in alt data marketplace Battlefin last year.

Arguably coronavirus has accelerated this process, making alt data a bigger factor in price action.

As it becomes more deeply integrated into the fabric of markets, we are likely to see an increasing combination of alt data with traditional data into a trusted and more holistic view of individual securities. Overlaying job postings and interest rate swaps for example will become. We will think of alt data as simply another set of data and markets will be all the more transparent and well functioning for it.

4.     ‘Love’, ‘hate’ and ‘fear’ challenge earnings and output as data gets emotional

The sell-off in recent weeks has been a ‘first’ in many ways, not least because this is probably the first major downswing of the social media age. That, coupled with the technological advances in natural language processing since the global financial crisis, mean for the first time we can systematically analyse (in near-real time) how news and social media sentiment correlate with market movements.

For example, by monitoring thousands of positive or negative news articles about businesses and economies, our partners at MarketPsych can forecast economic growth well ahead of actual GDP data and even PMI numbers.

The granularity of data on sentiments ranging from love and fear to specific mentions of ‘violent conflict’ or ‘human infectious diseases’ for example, mean that increasing numbers of investors are analysing the behavioural triggers of their peers as buy and sell signals.

As markets try to ride the extraordinary turbulence of recent weeks, it’s easy to see why more and more have been drawn to such sentiment-based tools. We’ve seen a tripling of demand in this area.

MarketPsych CEO Dr Richard Peterson makes the point that during this crisis, investors initially showed an emotional under-reaction to serious news coming out of China but then once they started to process the information tended to over-react with emotion, leading to a price overshoot.

Image 3: ‘Fear’ as measured in US news articles and social media spikes above the trend line in late February (shown by the red shaded area). That correlated with a steep decline in the value of the S&P500 (in orange).

In the longer run, these psychological insights will be a game changer in shifting the kind of data that will drive markets. It is yet another example of the way in which coronavirus will reshape financial markets forever.