Markets react to rising coronavirus fears

David Joy – Chief Market Strategist, Ameriprise Financial
Weekly markets commentary — Feb. 24, 2019

Fear regarding the impact of the coronavirus has intensified. It began last week, on Friday, after the U.S. flash PMI report showed a surprisingly significant impact on U.S. economic activity. The selloff was enough to push the S&P 500® index to its first decline in the past three weeks. But that was just a prelude to the fear that took hold over the past weekend, as cases of the virus have spread to other countries in Asia, especially South Korea, and as far away as Italy and Iran. Concern has shifted away from a primary focus on the economic impact of the virus to the more fundamental issue of its containment. Statements of concern by several healthcare professionals over the weekend were not reassuring. 

South Korea moved to “highest alert” to mobilize efforts to prevent the virus from spreading. As it is, in less than a week, the number of confirmed infections has risen from 31 to 833, along with seven deaths. The investor reaction has been swift, as the Korean Kospi index plunged 3.9 percent on Monday. Stocks in Thailand fell 4.0 percent, and 3.2 percent in Vietnam. Japanese markets were closed. Trading in Europe is exhibiting the same fear. Stocks in Italy are down 4.9 percent in midday trading, while most other markets are lower by more than 3.5 percent. U.S. futures are pointing to a 2.4 percent decline. Industrial metals, agriculture, and energy commodities are under pressure as well. 

As expected, haven assets are rallying

Gold is higher by 2.3 percent to $1,682 an ounce. The yield on the ten-year Treasury note is down eight basis points to 1.39 percent, within shouting distance of its 1.36 percent low. The yield curve between the 3-month bill and ten-year is -15 basis points. The thirty-year bond yield is at a new all-time low of 1.85 percent. The dollar is stronger against the euro and the pound, but weaker against the yen. 

The reaction in mainland China on Monday was, in contrast to other markets in the region, surprisingly subdued. The Shenzhen CSI 300 index was lower by just 0.4 percent. China has been reporting a decelerating number of new infection cases daily, and the government is encouraging businesses in the less impacted provinces to return to work. Bloomberg reports that roughly 70 percent of businesses have reopened, but because of shortages related to supply chain disruption and absent workers who have yet to return from the holiday, business overall may be operating at only 50 percent of capacity. As workers do return, the risk of acceleration of infections rises. 

At the G20 finance ministers meeting over the weekend, the IMF General Director reported that its updated baseline case analysis of the economic impact of the coronavirus outbreak assumes a 0.4 percent decline, to 5.4 percent, from its previous estimate of China GDP this year. It also assumes a decline in global GDP of 0.1 percent from its previous estimate of 3.3 percent. But she warned that, while the baseline case assumes a V-shaped recovery, such an outcome is not assured. 

Manufacturing data surprises investors 

The weak U.S. flash PMI report on Friday came as a surprise. It was expected that consumer activity would continue to support the U.S. economy, while Europe would come under increasing pressure. In fact, the opposite happened. Instead of remaining stable at a reading of 53.4 as expected, the all-important service sector report fell below the expansion/contraction line to 49.6, its first decline in four years. A small decline in the manufacturing sector report from the previous month, although still an expansionary level reading, resulted in the composite PMI index contracting for the first time in four years. In the Eurozone, it has been primarily manufacturing that has been battered by trade wars, Brexit, and now the coronavirus. But surprisingly, manufacturing contracted at a slower than expected pace in February, resulting in a rise in the composite PMI index, which remained in expansion territory. 

Important economic reports scheduled for this busy week in the U.S. include durable goods orders, personal income and spending, the PCE deflators, consumer confidence and sentiment, and new and pending home sales. Overseas, of particular interest, will be the late week release of the February PMI reports from China.