What do we actually know and how are markets reacting?
There are so many contradictory reports pertaining to this virus that it is impossible to accurately quantify the effects. Several new countries, including Afghanistan, Bahrain and Iraq, announced their first cases yesterday. Additionally, Italy, South Korea and Iran have seen large increases in numbers of both cases and deaths. There are slightly more positive signs in the Chinese data but then the accuracy of this data, as with the Iranian figures, is far from certain.
The people under the most severe threat are, not surprisingly, older people. Those with existing lung conditions are at the highest risk and even smoking can have an impact. This last point is one explanation which has been given for the mortality rate in China, where more than 52% of males smoke – China accounts for 40% of worldwide tobacco consumption.
Away from the very real human tragedy, here in Europe it has been the Italian escalation of reported cases, including towns in lock down, which has brought home the real threat that the virus carries. Yesterday (Monday 24th February) saw markets take a significant leg down on the new contagion figures. This was coupled with a realisation that the economic effects, whilst still being almost completely unknown, are bound to be significant.
In the panic of the moment it’s easy to forget that equity markets, such as the US, are still sitting just off their all-time highs. The reason for the muted response thus far is that the real driver of risk assets is, and remains to be, central bank intervention (interference); the kind we have witnessed for over a decade now. There are already murmurings from the Fed (US) and ECB (Eurozone area) about further rate cuts etc. At the same time, central banks are calling for fiscal intervention from governments. The Eurozone was already planning potential stimulus via their green deal.
The bottom line is this; if the disease remains contained, or at least the trajectory of the disease can be quantified, and governments/central banks continue to throw the kitchen sink at markets through stimuli/liquidity then risk assets can push on from here. If, however, these same politicians/bankers disappoint, or the disease mortality rate increases, the equity markets will likely fall.
Whatever happens in the coming days, the economic data and confidence indices are likely to show very disappointing results. The good news for investors is that the same data may very well work as justification for the expanded stimulus mentioned above. Finally, it remains the case that bad economic data can be good for risk assets. It doesn’t matter if it’s counter-intuitive, buy the dip has worked for over a decade up to and including yesterday.
