As Europe’s coronavirus death rate climbs, China’s recovery from the epidemic has become a bellwether for investor sentiment

If economic activity resumes in China without triggering renewed clusters of outbreaks, investors will conclude that aggressive containment measures can be successful and they will have clarity on the depth and duration of the crisis

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A woman takes a photo of cherry blossoms at a park in Beijing on March 14. China reported 11 new infections of the coronavirus that day, and for the first time since the start of the epidemic, most of them were cases imported from overseas. Photo: AFP

Published: 1:00am, 20 Mar 2020Updated: 2:29am, 20 Mar 2020

In the space of just two months, the rapid outbreak of Covid-19 in Wuhan has morphed into a fully fledged global financial and economic crisis.

The speed at which the coronavirus – which was labelled a pandemic by the World Health Organisation last week – has sent markets into a tailspin is striking. As recently as February 19, the S&P 500 equity index stood at a record high. Since then, it has plunged 29 per cent.

On Monday, the index suffered its sharpest daily fall since 1987, sending the VIX Index, Wall Street’s “fear gauge”, to its highest level since the 2008 financial crisis.

Gauges of stress in the financial system are rising sharply. Companies and banks are hoarding US dollars to service their debts and keep business flowing during the crisis, causing a dollar funding squeeze. Corporate debt markets have come under severe strain – spreads on high-yield energy bonds have surged to a record high – while Italy’s benchmark borrowing costs have more than doubled over the past fortnight.

The turmoil stems partly from the near certainty of a global recession in the first half of this year, as the world’s leading economies face severe and widespread disruptions caused by lockdowns and social distancing measures aimed at containing the spread of the virus.

The crisis has spurred policymakers into action. The US Federal Reserve has gone “all in” in an effort to ensure that the all-important plumbing of the financial system does not break down.