Not all market moving news is made equal. The tone or sentiment of the news, whether positive or negative can have a big impact on market prices. This is being demonstrated at the extreme in real time. As COVID-19 spread its tentacles around the world and infected both people and markets, global media news sentiment became increasingly negative as developed economies began to be hit.
Analysis carried out by the IMF and the World Bank assessed the impact of media sentiment on global equity prices using more than 4.5 million Reuters articles published across the globe between 1991 and 2015. They constructed a measure of news sentiment weighing articles with the frequency of positive (strong, gains, recovery etc.) and negative words (crisis, losses, deficit, etc.). They found that changes in news sentiment can predict movements in both advanced and emerging equity markets over a period of a few weeks.[i]
As you might expect they found that investors are more sensitive to global news sentiment (i.e. news affecting more than one country) during periods when the price of global equities are in a downturn. Investors typically weigh the prospect of losses much more heavily in their minds than wins. The research found that the impact of sentiment was four times more powerful in bear markets than bull markets.
Global news sentiment explains more of the variance in equity returns across the world than other typical measures of global risk aversion. In turn, global news sentiment is driven by multi-country news, which tend to be broader, longer and with a stronger tonality than local news articles.
The analysis also found that the content of the news varies significantly with the direction of global news sentiment. When sentiment is strongly positive, global news coverage tilts towards positive financial and corporate news in advanced financial markets, especially in the US. By contrast, the coverage tilts strongly towards economic and political news in emerging markets when the global news sentiment goes into negative territory.
Chinese economic activity (using coal consumption for power generation as a proxy) has arguably been on an upward trajectory over the past two weeks. Since early March, newspapers (both Chinese and non-Chinese) are using more positive words (picks up pace, recovery, return to normal) suggesting that economic growth may have some momentum.
Watch for similar stories in Iran, Italy and elsewhere over coming weeks. The lesson from this research is that it won’t be until the USA has seen the full force that the negative news sentiment will abate. The media is a giant mirror on ourselves. It pays to look at it sometimes to see what it is telling us.
[i] Fraiberger, Samuel P. and Lee, Do Q and Puy, Damien and Ranciere, Romain, Media Sentiment and International Asset Prices (December 2018). IMF Working Paper No. 18/274. https://ssrn.com/abstract=3314609