Written by Jameel Ahmad, Global Head of Currency Strategy and Market Research at FXTM
This unforeseen epidemic has infected as many as 17,000 people across the world and resulted in the fatalities of 360 infected as of time of writing.
There has been criticism that more people pass away from other illnesses per year and that the reaction to the virus is debatably overblown (fatality rate of 2%), but from the perspective of investors a cure remaining to be found and multiple nations announcing either travel restrictions for those who have recently been in China or postponing flights entering or departing China is a concern to investments.
The causalities in financial market asset classes include world stock markets trending lower over fears what impact the timing of Chinese New Year and such a festive period of the year for many could have on the economy and Oil prices losing an astonishing 10%. Emerging market currencies that are not pegged to the USD have also declined as a result of investors being reluctant to take on risk, while the Shanghai Composite Index suffered its biggest one-day drop in four years at 8% when trading resumed following the Chinese New Year holiday and China’s CSI 300 Index plunged by more than 8% to record its worst opening in close to 13 years.
The news that Oil prices have suffered a drastic loss of 10% on the coronavirus outbreak has been a headline attractor, although such a decline highlights how sensitive investors are reacting to a vital period for the world economy. World institutions are regularly pointing out that global economic growth remains close to levels not seen since the global financial crisis and with China only weeks ago signing the long-awaited trade agreement with the United States, it was hoped that this would boost economic readings including headline GDP growth in China falling to its lowest level in three decades. Instead, there are images widespread across the media of empty streets and this does not bode well for consumer sentiment.
This signals that the consumer is not spending in China right now and this is a double-blow for two reasons. Firstly, the China economy has strategically changed to be more consumer orientated against import-reliant since the last decade and these measures have started to show initial success, such as official statistics from the first half of 2019 highlighting that consumer spending equated for 60% of GDP growth. Secondly, the largest increases in consumer sentiment from 2019 also occurred in January and March, the same period of the previous Chinese holiday.
Do these figures truly justify the losses that risk assets have suffered? Not yet in my view. A great deal of assumptions have been made that two weeks of reduced activity in China will have a sharp impact on the world economy. There is hope that a cure will be identified and any losses in productivity can be restored from what is from an economic standpoint, a short period. If the situation doesn’t change after a month or so there is a larger risk as to what impact the virus will have on the global economy.
In contrast, it is expected that the protracted US-China trade tension saga of 2019 has shaded as much as 0.6% from world GDP. The virus has not had such an impact by comparison.
Therefore, the reactions seen from investors so far to the virus scare is somewhat excessive. A 10% plunge in Oil prices along with the moves seen in China stock markets on 3 February suggest that investors are preparing for the worst, in a fight or flight scenario. If a cure is found, and hopefully it will then the probability is strong that the market will rebound. This means that China shares can attempt a 10% recovery, and that there is an opportunity for investors to take profit from the table in safe haven positions such as Gold and the Japanese Yen.
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