Stockmarkets finally succumb to Covid-19 coronavirus

Stockmarkets have finally reacted to the coronavirus epidemic, seeing their worst day in two years. And there is likely to be worse to come.

Global trade bellwether Maersk has faced a “very, very weak February”
(Image credit: 2013 AFP)

The coronavirus has gone global, says David Fickling on Bloomberg. News of outbreaks in Italy, Iran and South Korea suggests that Covid-19 is “skipping past our quarantine cordons”. The World Health Organisation this week stopped short of officially declaring a pandemic, but if similar clusters keep emerging then that “alarming prospect” will not be far away.

Markets roll over

“Equities have finally succumbed” to Covid-19, says Rupert Thompson of wealth manager Kingswood. Confidence that the outbreak would soon be contained had seen markets trading close to all-time highs. No longer. News of the global spread of the disease has spooked traders.

World markets had their worst day in two years on Monday. The S&P 500 fell 3.4% to lose all its gains for this year; Italy’s MIB plunged 5.4%. The FTSE 100 fell back 3.3%, marking the worst day for UK stocks since 2016. Safe havens have rallied. The US ten-year Treasury yield fell close to 2016’s record low. Gold has broken through $1,600 per ounce.

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The newfound anxiety in markets is long overdue, says Robert Cyran on Breakingviews. Traders are finally waking up to the vulnerability of the world’s intricate supply chains. Take car manufacturers, which rely on “tens of thousands of parts” sourced worldwide. Chinese factory closures have caused Fiat Chrysler and Hyundai to halt production at plants in Serbia and South Korea for want of the correct widgets. “Supply chains are only as strong as their weakest link.” With production idling and supply falling, basic economic theory suggests that we should be in line for a spike in inflation, says The Economist. Yet Covid-19 is “not a conventional economic threat”. If the outbreak causes a bout of “anxiety-induced frugality” among firms and consumers then the resulting demand slump could mean weaker growth and lower inflation. Slumping commodities prices suggest that deflationary forces are winning out for now.

Worse than a trade war

Analysts have been turning bearish, says Liam Halligan in The Daily Telegraph. Trade payments insurer Euler Hermes predicts that the global impact of the coronavirus will be “bigger than the US-China trade war”. Shipping firm A.P. Moller-Maersk, a bellwether for global trade, says that it faces “a very, very weak February and a weak March”. That may be a taste of what lies in store. “Even if this killer bug goes no further... truly shocking” data will deliver a big hit to sentiment over the coming months.

There may well be more pain ahead, agrees Clara Ferreira Marques on Bloomberg. In the 2003 Sars outbreak Hong Kong’s market fell by almost one-third peak-to-trough. This time it is down 8%. Don’t panic just yet, says Annie Nova for CNBC. “Stocks typically rebound from outbreaks within six months to a year.” Of course, the past is not necessarily a guide to the future. But those who have remained calm through previous epidemics “usually come out ahead.”