Macroscope | Three reasons the coronavirus outbreak may hit financial markets harder than Sars did in 2003

China today accounts for a much greater share of the global economy and is more reliant on domestic consumption, which has been affected by the trade war and Beijing’s deleveraging campaign

Meanwhile, valuations in both stock and bond markets are already stretched

Reading Time:3 minutes

A pedestrian walks in front of an electric quotation board displaying share prices of world bourses in Tokyo on January 27, when global stocks suffered their worst day in almost four months. Photo: AFP

Published: 5:00pm, 30 Jan 2020Updated: 4:31pm, 2 Feb 2020

Last Friday, the euro zone economy – one of the main focal points for investor anxiety over the slowdown in global growth – received some encouraging news. According to preliminary data published by IHS Markit, the bloc’s manufacturing sector, which is still contracting, showed further signs of stabilising, with the rate of decline in output this month easing significantly.

As recently as a fortnight ago, increasing evidence that Europe’s manufacturing downturn has bottomed out would have cheered financial markets, underpinning the prevailing narrative that global growth is recovering, supported by an easing of trade tensions and the prospect of a “lower for longer” interest rate regime in the world’s leading economies.

Yet, the sudden outbreak of the deadly coronavirus in Wuhan – which has killed more than 130 people and has spread beyond China’s borders – has punctured the optimism in markets.

On January 27, global stocks suffered their worst day in almost four months, data from Bloomberg shows, while a surge in demand for so-called “haven” assets caused the value of bonds trading with negative yields to rise by US$860 billion, the largest daily increase since Bloomberg began tracking the data regularly three years ago. Commodities have also come under strain, with traders selling oil and industrial metals because of concerns about a slump in demand.

Although fears over the spread of the virus triggered the sell-off, the disease has hit a pressure point in markets, one that has been apparent for some time but has been offset to some extent by central banks’ pivot towards looser monetary policy, led by the US Federal Reserve.

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.css-1m2rp1p{color:#34b8b5;}Macroscope | Three reasons the coronavirus outbreak may hit financial markets harder than Sars did in 2003

Macroscope | Three reasons the coronavirus outbreak may hit financial markets harder than Sars did in 2003