Is there any sense to panic because of the coronavirus spread?
Stock markets have reacted to the threat of the coronavirus in the PRC with a kind of apprehension. Oil prices fell by 10%, commodity prices came down by 6%, stock exchange indices lose about 2-3% each.
Real forecasts differ from the actual low growth and it leads to the beginning of the correction. At the conference in Davos experts actively discussed the topic of reaching new highs, despite the bubble which appeared in the stock markets. The main hope lies in easing monetary policy in the states, as well as an increase in stimulation of the economy by the fiscal authorities. The additional value to securities is given by the high level of differentiation in the world and significant volumes of buybacks by organizations. For the first time in a decade, markets are failing to keep up with the trade contraction, and the coronavirus is likely to become a trigger to sentiment adjustment.
Commodity markets most clearly reflect investor concerns, as China is the leading consumer of resources. The new virus emerged during the most unfortunate period, when the level of tourism, low production and investment activity increases before the Chinese New Year. The country’s economy is already weakened by the confrontation with the United States, as well as due to a significant rise in food prices. African swine cholera has led to a 66% increase in meat prices.
Thanks to fiscal and monetary policies easing, it was possible to maintain the growth rate of the Chinese economy. It is not yet known how serious the new blow will be for the country’s economy, and how soon it will be able to recover. This creates uncertainty that will be difficult to resolve with an infusion of funds. Markets are not scared of the virus itself, but rather of the government’s introduction of preventive measures to stop its spread: closing cities, restricting travels, extending the New Year holidays for an indefinite period.
Long holidays cost China 3% of GDP. The situation is partially balanced by an increase in consumer activity. Officially, the holidays have been extended by a week, but in fact, the majority of organizations have not been working for two or three weeks.
In Beijing, the weekend has been extended until February 10, in some cities until February 17. The holidays will be extended for a longer period depending on the circumstances. If the spread of coronavirus will be stopped, the losses for the world economy will be about 0.1 points, and for China, about 0.5 points of GDP growth.
The markets will be in uncertainty for several weeks, which could increase panic among their participants. In addition, Chinese investors are key players on the stock exchanges. If by the time of their return the collapse is significant, then with the return, a wave of sales may begin, and the pressure on the securities market will increase.
10 years ago, the return of Japanese investors after a long vacation to a weakened market was the trigger for the fall in stock exchanges. The collapse was mitigated by the new program of the US Federal Reserve Service, it was transformed into a correction in asset value by 15-20%.
Probably now is the time for another correction, which will accelerate the process of tax cuts in the United States, and also force the FRS to ease monetary policy.