Investors in the United States have mostly ignored the impact of the coronavirus ravaging China. That changed on Monday when news of the spread of the epidemic prompted them to sell their shares – at a breakneck pace.
The S&P 500 Index, which had reached a record level as recently as Wednesday, fell 3.4%, its worst performance in a day since February 2018. As analysts issued new warnings that the epidemic could cause of economies around the world, stocks have fallen enough to wipe out all of the index’s gains for 2020.
The day was hectic for stocks around the world: European markets recorded their worst session since 2016 and the main Asian benchmarks also closed.
“There was a cavalier attitude about the virus,” said Bruce Bittles, chief investment strategist at Baird, an investment bank and financial management company. The threats appear to be increasing, he added, “think of a global economy that is sliding enough to cause a shortfall.”
On Monday, fears were mounting that the epidemic could spread further in Asia and Europe.
South Korea, a large industrial center, reported 231 new cases a day after its government declared its readiness to use emergency powers if necessary. And public media in Iran reported that the virus had killed 12 people there – the highest death toll outside of China.
In the United States, the Centers for Disease Control and Prevention said there were 53 people infected with the virus, up from 34 on Friday. Almost all of the new infections involve former passengers on the Diamond Princess cruise ship docked in Japan, who have been quarantined at military bases in California and Texas. British authorities have announced that four passengers who have been quarantined since their return to the country have been infected, bringing the number of cases in that country to 13.
Not all the news was bad. China could control the epidemic, said the World Health Organization. Health officials said the daily count of new infections has been decreasing since February 2 due to the closure of Wuhan, the city at the center of the epidemic. Government and Chinese companies have started chartering trains, buses and planes to recover workers stranded by travel restrictions put in place during the Lunar New Year holidays.
“We are encouraged by the continuing decline in cases in China,” said Dr. Tedros Adhanom Ghebreyesus, the organization’s chief executive. However, he warned that the epidemic could worsen.
“Does this virus have pandemic potential?” he said. “Absolutely.”
New pessimistic forecasts for the economy began to emerge last week.
In a note posted Friday, JPMorgan Chase economists wrote that they expect global growth to slow at an annual rate of 1% in the first quarter, which would be the weakest quarter of economic expansion which started after the deep recession that started 12 years ago. since.
In the United States, the consensus estimate of domestic growth in the first quarter slipped to 1.5%, according to data from FactSet Monday, from 1.7% in late 2019. Economists at Goldman Sachs, who s expected domestic growth in the first quarter in late January, have steadily lowered their estimate, which fell to 1.2% on Sunday. “The risks are clearly downward biased until the epidemic is brought under control,” they wrote.
The stocks of airlines and technology were particularly affected Monday. Delta Air Lines shares fell 6.3% and American Airlines slipped 8.5%, while Apple shares fell 4.8%. The tech-rich Nasdaq composite index fell 3.7%.
The liquidation continued on Tuesday morning in Asia, from Japan: the Nikkei 225 fell by around 4% after the start of trading in Tokyo.
Oil prices fell, with a barrel of West Texas Intermediate crude slipping nearly 4% to around $ 51, due to lower demand from factories and slowdown in travel restrictions.
Investors have rushed to safety: gold – considered a refuge during market turmoil – has peaked in seven years. It has increased by almost 10% since the start of 2020.
And the money poured into government bonds, lowering bond yields, which move in the opposite direction of prices. The yield on the 10-year Treasury bill fell to 1.37%, near the lowest record of 1.36, a level hit in July 2016. The yield on the 30-year bond is already in record territory at 1 , 83%.
Falling yields can support the stock market if it reflects the Federal Reserve’s heightened interest rate cuts. But a similar drop could also be bad news if it results from the general expectation of weaker growth. The difference between the two is a matter of interpretation. But the sharp drop in recent days seems to have pushed investors towards this last point of view.
“It is this change in narrative that forces equity investors to wake up from the complacent stupor in which they find themselves,” said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.
Federal Reserve and Trump administration officials are monitoring the situation closely, although the central bank’s main tool for fueling growth – lower interest rates – is not very useful if factories do not produce no goods and supply chains are disrupted by quarantines.
Central bank officials have made it clear that they do not expect to cut interest rates again unless rising risks jeopardize their prospects for stable growth. So far, they have cautiously suggested that there is no need to raise an alarm.
But that was before the outbreak of infections outside of China this weekend.
“The chances of Fed cuts are going up a lot,” Roberto Perli of Cornerstone Macro wrote on Monday. “But we have to understand that monetary policy is not well equipped to help in the situation we face.”
Like the Fed, the White House has been cautious in declaring the disease a major concern. Tomas Philipson, acting president of the White House Council of Economic Advisers, said at the National Association for Business Economists conference in Washington that it was too early to say how bad the effects of the virus will be.
“We don’t know yet, we’re sort of taking a wait-and-see approach,” he said, also noting that the scale of the seasonal flu is far greater and that “in terms of public health impact on the economy, I think that has been exaggerated. “
