The Market Today

Coronavirus Fears Continue to Spread Through Global Markets


by Craig Dismuke, Dudley Carter

FEARS OF CORONAVIRUS SPREAD

Coronavirus Weighs Heavily on Markets: The Coronavirus has rapidly become a major concern for global health experts and the financial markets.  With the Chinese stock market closed for the Lunar New Year holiday, we have not seen the direct impact on Chinese equities, other than a 3.1% drop on the final day of trading before the holiday and a 1.7% drop in the week prior (4.8% decline cumulatively). Stock markets which remain open, however, have begun to reflect the concern, particularly coming into this week. Japan’s Nikkei 225 is down 3.1% over the past week, including a 2.0% drop overnight.  The S&P 500 capitulated on Friday, falling 0.9%, and is poised to fall more sharply this morning. Dow futures point to U.S. equities opening Monday down 1.8%.  After falling 14 bps last week, the 10-year Treasury yield is down another 8 bps to 1.60% in overnight activity.

Coronavirus Growth Rate Well Above SARs Growth Rate: Coming into today’s trading session, there are now over 2,800 confirmed cases including 81 deaths and five confirmed cases in the U.S.  Official data from China’s National Health Commission show the rate of confirmed cases growing close to 30% per day. If this rate continues, the number of infected persons will exceed the SARs pandemic by Friday.  In fact, confirmed SARs cases grew closer to a rate of 6% per day for the first two months.  To illustrate the difference, with SARs it took thirteen days to go from 1,300 infected persons to 2,800.  With the Coronavirus, it took two days.  The longer incubation period for Coronavirus (7 to 14 days versus 2 to 7 days for SARs) is particularly worrisome now that officials have confirmed that the virus 1) can be transmitted from person to person and 2) can be transmitted when a person is asymptomatic.

Economic Impact Likely to Be Regional, Presuming Virus Is Contained: From an economic perspective, we expect some Asian countries to be hit dramatically by the outbreak.  The SARs experience showed a substantial plunge in retail sales in China, and the overall growth rate slowing for one quarter in 2Q03.  However, the economy continued to expand.  Countries dependent on Chinese demand were harder hit.  As an example, Singapore, heavily dependent on Asian tourism, saw Asian tourist arrivals drop 81% in April and May of 2003 leading to one quarter of economic contraction.  Today, Singapore is even more heavily dependent on Chinese tourists, specifically.  With the outbreak occurring at one of the busiest periods of travel for Chinese, the impact to surrounding countries is likely to be quite damaging.  The U.S. economy, however, saw very little impact from SARs other than an arguable tightening of financial conditions amidst all of the market volatility.  Presuming the virus is contained and the growth rate slows, we expect the U.S. economy to be mostly insulated from the spillover of weakness in Asia.

Market Volatility Likely with Flight-to-Quality in Place Until Peak Hysteria: The market is likely to remain very volatile until the growth rate of infected persons begins to slow.  In 2003, the S&P 500 was down 9% year-to-date by the time the World Health Organization issued its global alert on March 12. Yields also began to fall in a flight to quality with the 10-year dropping from 4.19% (Jan. 9) to 3.59% (Mar. 10).  The yield then shot 51 bps higher over a seven-trading-day period. As the SARs hysteria peaked, yields dropped to 3.13% by June 13.  Also contributing to the decline was a growing belief that the Fed would cut rates at their June 25, 2003 FOMC meeting.  They did, citing risks to low inflation, which preceded an almost-150 bps run higher for the 10-year, reaching 4.61% by September. Incidentally, stocks were boosted by the lower interest rate environment and eventual Fed cut, getting back to breakeven for the year by mid-April before closing the year up 26%.  In today’s environment, we expect to see Treasurys benefit from the flight to quality until peak hysteria is reached.  Based on the current growth rate of confirmed cases, it does not appear that we are near that at this time.


TODAY’S CALENDAR

New Home Sales: This week’s calendar is packed with data, a Fed decision, and important corporate earnings reports.  However, today will bring just the December New Home Sales report and the January Dallas Fed Manufacturing report.  Focus will remain on the coronavirus tallies.


OVERNIGHT TRADING

Coronavirus Fears Continued to Spread Through Global Markets: As discussed above, markets are in full meltdown mode on Monday with investors scrambling to pare risk form their portfolios as they try and wrap their arms around the rapidly-spreading coronavirus. While China and many other Asian markets are closed for the Lunar New Year, Japan’s Nikkei sparked another sell-off at the open of the overnight session. The risk-off tone has hit European markets hard as well, dragging the Stoxx Europe 600 down 1.9% by midday. As equities as tumbled, Treasury yields have declined with those in Europe as investors seek a safe place to park their cash. The 2-year yield was down 5.0 bps before 7 a.m. at 1.45%, a new low since October 8. The 10-year yield also slumped to its lowest level since early October.

Yields and Commodity Prices Fall Amid Worries Around Global Demand: With so much uncertainty still surrounding the containment efforts, fears of an increasingly negative economic effect have grown. Chinese officials have extended the Lunar New Year holiday break and lengthened the forced closure of Chinese factories in some major metro areas as they try to stem the illness’s spreading. Over the weekend, a Chinese government official noted travel figures for the first day of the holiday showed a nearly 30% decline from a year ago, one of several reports implying economic consequences are already being felt by the world’s second largest economy. Amid worries that the slowdown is likely to weigh on output, commodity prices continue to suffer. Oil prices fell another 2.5% overnight with WTI trading just below $53 per barrel, its lowest level since mid-October.


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