Coronavirus Drives Market Uncertainty

Author: Lindsey Boycott

Estimated read time: 3 minutes

Publication date: 10th Feb 2020 10:09 GMT+1


Photo by Dimitri Karastelev, on Unsplash

There’s no shortage of blockbuster outbreak-apocalypse thrillers that people tune into every week to feed that curious mix of fear and fascination they experience. On January 12, China's state broadcaster reported that a "new viral outbreak was first detected in the city of Wuhan, China, on December 12, 2019," and life is now imitating art. The coronavirus, as it's known, hit the international stage like a bomb – with speculations about the cause, rates of infection, and needs for quarantine.

Despite the chaos, the markets are weathering the coronavirus reasonably well, says investor Edward Yardeni. As a Wall Street icon who ran investment strategy for firms like Prudential and Deutsche Bank, he believes the more prolonged the virus lifecycle, the more likely it stresses the international economy and runs the risk of a market correction.

Diana Mousina, an economist at AMP Capital Investors, echoed Yardeni’s sentiment in an interview with Bloomberg TV: “The coronavirus seems to be going on for longer, is infecting more people and the hit to growth will be longer. You won’t be able to recoup all of the negative impacts in the first quarter.”

Despite the harbingers of market disruption doom, the S&P 500 and Dow stayed buoyant last week with a four-day win streak that only broke on Friday. Even with the dip, they're still sitting pretty at 3 percent and 2 percent increases over the same time last year, respectively. Yardeni remains optimistic about  'Red, White, and Blue' emerging victorious even if the coronavirus comes knocking on NYSE's door. "Interest rates are so extraordinarily low," he said. "The central banks have basically provided no interesting reasons to buy in the fixed-income markets and lots of reasons to buy in the stock market."

Conversely, other analysts are urging investors not to get complacent about the coronavirus. China has become a vital part of the global business community, and what affects the Cathay nation, affects everyone. Since 2003, it's become the world's manufacturing hub for everything ranging from Apple iPhones to Nike sneakers. Combine that with the rise of a wealthy class of Chinese citizens with a taste for luxury items, cars, and travel, and the People's Republic should not be underestimated.

Another consideration is the size of China's economy. In 2003, the East Asian country accounted for an estimated 4 percent of the world's Gross Domestic Product – it currently sits at 16 percent of global output.  A downward trending Asian market is making waves with those closer to home – US stock fell along with their Easter counterparts. Equities in South Korea, Japan, and Australia also opened lower on February 9.

Much will be determined by how the coronavirus runs its course. Globalization has created trade that spans across national borders and increasingly interdependent economies.  With cases of the virus spreading both inside of China and out – investors will be watching for upticks that may cause disruptions.

Also, many of the major central banks have exhausted the majority of their financial reserves they would deploy to mitigate the severity of economic downturns. Nation debt levels have reached new highs, and the inter-connectedness of borrower and creditor may compound the problem. Finally, the rising tide of nationalism seen in many countries may make it more challenging to coordinate a global response to the coronavirus, if needed.

 

Sources:

https://www.nytimes.com/2020/02/02/business/global-markets.html

https://www.cnn.com/2020/02/09/investing/stocks-week-ahead/index.html

https://en.wikipedia.org/wiki/Timeline_of_the_2019–20_Wuhan_coronavirus_outbreak_in_December_2019_–_January_2020

https://ca.finance.yahoo.com/news/stocks-start-week-caution-big-213747151.html

https://www.cnbc.com/2020/02/09/coronavirus-is-the-biggest-threat-to-rally-right-now-ed-yardeni-warns.html


Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.com. The observations he makes are his own and are not intended as investment or trading advice.