It won’t be long before the coronavirus catches up with exuberant stock markets

The outbreak is already dragging down commodity and oil prices, and risks from post-Brexit negotiations and US electoral uncertainties will increasingly come into play. The giddy rallies in US stocks cannot last

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In the face of an escalation in geopolitical tensions and the rapid spread of the coronavirus, the S&P 500 index is up by more than 3 per cent and currently stands at an all-time high. Photo: Getty Images/AFP

Published: 1:00am, 7 Feb 2020Updated: 4:17am, 7 Feb 2020

For an indication of the extent to which the resilience of financial markets should not be underestimated, look no further than the performance of the benchmark S&P 500 equity index since the start of this year.

In the face of an escalation in geopolitical tensions and the rapid spread of the coronavirus – which has turned traders and investors into amateur epidemiologists, frantically speculating about the severity and duration of the health scare to gauge its likely impact on global growth – the index is up more than 3 per cent, and currently stands at an all-time high.

Even a gauge of global stocks excluding US shares – which continue to benefit hugely from the strong weighting of technology companies, long the darlings of Wall Street – is down just 1 per cent since early January. What is more, data from Bloomberg shows that measures of implied volatility in global currency markets are close to their lowest levels on record.

The most oft-cited explanation for the persistent resilience of markets is the ultra-loose monetary policies of the world’s leading central banks. The US Federal Reserve cut interest rates three times last year and has been buying US$60 billion of Treasury bills per month since October, a move that most investors view as a de facto resumption of quantitative easing.

Yet, the relatively limited damage in markets – most apparent in the strong performance of US equities – masks a significant, and potentially decisive, shift in sentiment.