Markets face fresh jolt of coronavirus nerves
Investor optimism over the impact of the health crisis has collided with reality
That funny smell in the air is the unmistakable odour of screeching brakes and hot tyres skidding to an abrupt stop. For weeks, the broad assumption among investors has been that, as far as markets are concerned, the coronavirus that originated in China is a real but peripheral worry, an unexpected hiccup in what will otherwise prove to be a decent if unspectacular year for stocks. Goldman Sachs assured clients less than two weeks ago that virus concerns were fading. Google searches for the term were tailing off, it said, which had “historically marked the trough in risky assets”. The US bank was not alone, far from it, and it went on to warn about potential complacency in markets just a few days later. Still, its initial optimism was widespread, with analysts modelling other outbreaks, such as Sars, swine flu and Zika, to guess that this virus too would pass quickly and without presenting undue concern for investors. As recently as Friday, BlackRock was bristling at the nervous rally in US government bonds, saying the decline in 30-year Treasury yields so far this year was excessive. Chief investment officer Rick Rieder said he was trimming exposure to long-dated Treasuries after the yield dropped under 1.9 per cent. “With bad news, everyone goes one way,” he said. “You want to try to be on the other side of it.” Since then, the yield has fallen further, to 1.82 per cent.
Investor nerves were reawakened over the weekend, when the virus prompted Italy to quarantine at least 10 towns in the northern regions that produce about half of the country’s economic output, according to calculations by Citigroup. “The impact on first-quarter GDP is likely to be large, even if containment measures last only for one week,” Citi said on Monday, adding that it doubted the disruption would be so short. An acceleration of cases in South Korea and Iran is also stirring fears that the virus could be running out of control. Italian stocks have led declines, dropping by nearly 6 per cent on Monday. UK stocks also fell by nearly 4 per cent, with airlines feeling a heavy strain: easyJet sank 15 per cent, while Ryanair fell 12 per cent. Gold continues to rally hard, while oil prices are stumbling again.
The cavalry is expected in the form of central banks, which have repeatedly stepped up to soothe scary drops in markets ever since the financial crisis. Over the weekend Haruhiko Kuroda, the Bank of Japan’s governor, was clear that he was watching how the virus spread and what economic effect it had. He said he was “well prepared” to act if needed. This is a noble effort, and few doubt it will provide at least temporary relief to financial markets. The expectation alone of monetary assistance may already be softening the blow. But anyone who can clearly articulate how easier policy can fix an economic pullback based on deaths, grounded flights, closed factories and ghost cities is very welcome to get in touch.