With the CDC issuing a mandatory quarantine for the first time in more than 50 years to Wuhan citizens, more than 9000 infected, the inversion of the yield-curve and the global indices realizing losses at an increasing rate – What is the coronavirus 2019-nCoV, and how is it effecting the global markets?
What is the Coronavirus?
First detected in Wuhan City, Hubei Province China, the new coronavirus (2019-nCoV) is a novel virus – a member of the coronavirus family that hasn’t been encountered before. Other members of this family include SARS and MERS. The origin of the virus is up for debate but according to the Wall Street Journal, there is a strong sense the source of the outbreak came from a cluster of vendors in a downtown market offering carcasses and live specimens of dozens of wild animals – from bamboo rats to ostriches, baby crocodiles and hedgehogs; this is the same location that triggered a deadly coronavirus breakout almost two decades ago. The World Health Organization on Thursday, January 30, 2020 has declared the coronavirus – which has sickened more than 9,500 people and killed over 200 – a public health emergency of international concern.
How are the Markets Responding?
At the time of writing this article, the Dow has dropped more than 600 points – the 30-stock average’s worst day since August – as the spreading viral outbreak fanned fears about global economic growth, igniting volatility across the markets. Other Indices are showing losses as well such as the S&P 500, which lost 1.8% and is expected to fall as much as 5% before the current stretch of declines is over, the Nasdaq Composite has fallen 1.6% and the volatility index, VIX, has shot up 25%. The S&P 500 had been on one of its longest stretches without a move of more than 1%, now we’re looking at a record three moves of at least 1% over the past 5 days. As investors dump their equities, they look towards less risky investments such as Treasury’s and gold. In one sign of growth worries, the yield on the benchmark 10-year U.S. Treasury note edged below the yield of the three-month bill F this week – this is known as a yield-curve inversion and are a sign of a potential recession. Oils also suffered their worst week in over a year, dragged by fears that the coronavirus will spread. With more and more airlines closing flights to and from China, the demand of crude oil is being diminished with oil futures falling almost 16% in January.
The Effects in China:
Because the virus is still new, the total economic impact is impossible to determine, but the fallout is still measurable. The Hang Seng – which includes the 40 largest companies traded on the Hong Kong Stock Exchange – has fallen 897 basis points since January 17th. Tesla (TSLA+1.52%) has been forced to close its new shanghai factory temporarily. Apple (AAPL- 4.43%) has lost production of suppliers in Wuhan, but the long-term impact on both of these companies remain unclear. Other sectors also have plenty on the line, especially during Lunar New Year. The Chinese tourism industry plays a major part in the economy, especially during Lunar New Year, which makes tourism a multibillion-dollar industry, but the industry has been decimated as the government quarantines major population centers and people avoid traveling for fear of becoming infected. Major hotels and airlines have offered refunds through most of February, while some airlines have suspended services completely to and from China.
According to Chinese economist Zhang Ming, aggressive action is likely to follow this sudden outbreak from the Chinese government in order to avert a more serious slowdown. Zhang expects the economic growth to slump by a percentage point to 5% in the first quarter, assuming the epidemic lasts until the end of march – this can prove to be damaging to China considering growth last year was already the country’s weakest in nearly three decades following the rising debt and fallout from its trade war with the United States. Some analysts at Nomura have a more bearish view of things to come, expecting growth to drop by two percentage points or more in the first quarter of 2020 – resulting in losses of $62bn in lost growth.
What to Expect Moving Forward?
Although the U.S, Chinese, MSCI, TSX indices realized losses, slowing economic growth in China and the yield curve inversion, the general consensus is still positive with regard to long term recovery of the markets. According to analysts from Charles Schwab, the Morgan Stanley Capital International declined in the month after January 2016 when the Zika virus spread to several countries but then returned 2.9% spread over the following 6 months. This data is supported in their analysis of 13 outbreaks since 1981 in which they found the index returned an average of .8% over a one-month period and 7.1% over the 6-month period following the initial outbreaks. To break it down, even when equities take short term losses from disease related worries, they tend to bounce back and stabilize in the following months because it has been rare for a contagious disease to bring consumer expenditures to a complete halt around the world.