Markets seem invincible, but will Coronavirus turn them?

The sort of disasters that apocalypses are made from have been common so far this year. The markets seem unperturbed. What impact will the coronavirus have?

Article updated: 3 February 2020 1:00pm Author: Michael Baxter

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I heard someone say on the BBC this morning that last week saw the worst five-day period for the S&P 500 since last year. Now I am not sure if this is common knowledge, but I can exclusively reveal that according to analysis I carried out especially for this article, last year wasn’t that long ago. It is possible that the suggestion that last week was the worst week throughout the entirety of 2020, had something to do with January always feeling like a long month.

In fact, the S&P 500 closed on the last day of January on 3,225.52. It began the year on 3,230.78. So let’s run that past you again, January saw talk of World War III trend on social media, following the death of Iranian general Qassem Suleimani. It saw evidence of climate change become impossible for those with their heads in the sand to ignore as a big chunk of Australia caught fire. A new disease broke out, which, from one point of view, is the stuff that Hollywood movies about a disease created apocalypse are made of. And the S&P 500 fell five points.

The FTSE 100 ended January on 7,286.01, compared to 7,542.44, which might suggest the London index has greater exposure to reality, or might suggest that London traders read too many comics.

This morning, however, the leading Chinese stock index, the CSI 300, crashed — 8.6 per cent down when I last looked.

Meanwhile, the mask business is booming — not sure how effective they are.

There is a scary and not so scary point here. According the latest study from Kambiz Kazemi of La Financiere Constance in Toronto, the number of new cases of coronavirus seems to be increasing by 30 per cent a day. It’s projected that there will be 80,000 new cases by the end of this week.

That is a frighteningly large contagion rate, made all the more worrisome when you consider that the disease is at its most contagious before people realise they have it. I will engage in some fear mongering before I try to introduce a dose of reality. If new cases were to continue to increase by 30 per cent a day, that means doubling every three days, by the end of March everyone on the planet would have had the condition.

On the other hand, the fatality rate is mercifully low. It is too soon to say for sure, but so far it looks like a fatality rate of around two per cent.

As I say, it is the speed of infection that provides the biggest cause for concern, and I gather a vaccination is some way off — more on that in a moment. It is because of this infection rate that authorities are likely to take extreme measures to try and stop the spread — and it is these extreme measures, however necessary, that pose the greatest economic threat.

To be clear, comparisons with other recent disease outbreaks don’t hold up. The economic impact of SARS was not that great, (outside of China, but even there? the impact was measurable but not that large) but the Chinese economy is much bigger today, its role within the global economy much more important. Besides, the Coronavirus is likely to surpass SARS in terms of number of cases very soon.

As for comparisons with other recent disease outbreaks, they don’t stand up either. Both Ebola (2014) and MERS (2012) had much higher fatality rates — 50 and 34 per cent respectively, but the diseases in question were largely contained to regions when the outbreak began. The consequences of Ebola were terrifying, but because the regions where the outbreak occurred have small economies, the impact on the global economy was not great. Ebola infected over 28,000 people, MERS, which is actually a form of coronavirus, infected 2,494. For those who caught the condition, the impact was awful, but the economic impact was modest.

The reaction to this current version of Coronavirus will be significant. I heard of someone who went to A&E because they had a cold. That may seem strange, but this follows advice from their GP. In this case, they developed the symptoms of what turned out to be a cold on a flight from Hong Kong to UK.

This illustrates one of the risks.

Smart phone companies are potentially exposed because China is home to most of their manufacturing. In the pharmaceutical industry, China accounts for 15 per cent of global drugs production.

So far, we have seen more than 10,000 flights cancelled,

The markets seem unconcerned (except in China) but maybe they should be.

I have another concern and it relates to racism and the forces of protectionism. US Commerce Secretary, Wilbur Ross, claimed last week that coronavirus will help bring jobs back to the US

Meanwhile? An editorial in the Economist suggested that China is especially vulnerable to such outbreaks because of the way people and animals mix — “the repeated mingling of animals and people,” is how it described it.

I fear that dark, populist, forces of the Far Right, playing to a receptive audience, will use this outbreak as a means to promote their dangerous agenda.

For the time being, let me make four more comments:

  • The Chinese economy’s latest quarter was the weakest in 27 years, coronavirus will hit at a time when the economy is already vulnerable. The government is responding with a massive stimulus, but I doubt it will be enough to halt an even sharper slow down.
  • In the US, the yield curve reverted again last week. This means that the yield on short-term US treasuries rose above the yield on treasuries with a longer-term maturity date. An inverted yield curve is meant to be a prelude to a recession. I doubt such an inversion was related to coronavirus, but it does show that the US economy is fragile, and it may not take much to tip it into recession. I would say that coronavirus is more than merely ‘much.’
  • Our ability to sequence DNA and ever more sophisticated computer modelling means that I suspect a vaccination is closer than is widely assumed. If government action fails to stop the spread of the virus but does slow the spread rate down, I suspect the vaccination will be applied.
  • Investors might want to buy at the moment of optimal panic — I don’t think that moment is yet. News of a vaccination could be the catalyst for a strong market rally.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

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Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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