Global financial market risk appetite is receiving a walloping at the start of the week, after the number of international cases of Covid-19 spiked over the weekend. Risk assets, including global equities, energy markets and risk-sensitive currencies such as AUD, NZD and CAD have all taken a beating.
At the time of writing (1100GMT), S&P 500 futures are 2.8% lower, the DAX is 3.5% lower and Brent crude futures are 3.8% in the red. On the flip side, safe-haven assets are in serious demand; US 10-year treasury yields are below 1.4% (at the end of last week they were at roughly 1.5%) and gold has shot through $1680. USD, which tends to perform well on coronavirus fears, is making decent headway in retracing its post-PMI data losses incurred last Friday.
The number of coronavirus cases reported internationally has risen sharply in recent days to more than 1500 cases in 28 countries. Particular attention is being given to South Korea and Italy, with the number of confirmed cases in the former having risen to above 800 (the largest outbreak outside of China) and the latter to above 200 (the largest number of cases outside of Asia).
The South Korean government over the weekend raised its infectious disease alert to its highest level. South Korean airlines said they are suspending ﬂights to Daegu, the country's fourth-largest city with the largest number of coronavirus cases, for the time being.
Moreover, over in Italy, almost a dozen towns in Lombardy and Veneto with a combined population of around 50,000 have eﬀectively placed under quarantine. Authorities there are reportedly struggling to ﬁnd out how the outbreak started.
Iran is also nursing an increasing number of cases; after announcing its ﬁrst two cases on Wednesday, it conﬁrmed a total 43 cases, of which eight have died. Most of the infections were in the Shi'ite Muslim holy city of Qom. Elsewhere in the Middle East, Kuwait and Bahrain have now detected their ﬁrst cases of Covid-19.
The World Health Organization (WHO) has expressed concern about the number of cases with no clear epidemiological link; i.e. the number of people who have contracted the disease without being in contact with another person who was confirmed to have had the disease. A rising number of cases with no epidemiological link is a concern as it implies that people are either not being properly diagnosed (remember, for many, the symptoms are no more severe than a common cold) or that the virus may be more contagious than previously thought.
However, things do appear to still be moving in the right direction in China, despite the growing number of international cases. The number of newly reported cases in China continues to fall (409 cases were reported on the 23rd of Feb and a further 150 deaths) and China has reportedly relaxed emergency response levels in a number of provinces.
Moreover, Chinese President Xi said the government will step up policy support measures to help achieve social development targets for 2020 and the Ministry of Finance will look into further targeted tax cuts and increasing transfers to virus-hit regions. Finally, PBoC Vice Governor Chen said the bank is looking at whether to cut the benchmark deposit rates.
However, China’s Hubei Province Xianning City Mayor said that they are concerned about a potential rebound in the number of coronavirus cases.
In terms of the hit to China's and the global economy, the International Monetary Fund predicted the outbreak would lower China's growth this year to 5.6% (prior estimation was roughly 6%) and shave 0.1% from global growth. However, this forecast is unlikely to reflect the potential for severe economic disruption in other global economies. Should the spread of the virus pick up in Europe, South Korea and Japan, the hit to global growth would surely be far more severe.
What does this mean for FX markets?
Since the outbreak intensified in China in mid-January, this has been a dominant market theme.
When the coronavirus situation appears to be getting worse, risk-off is triggered. This has the effect of causing flows out of risk-sensitive FX such as AUD, NZD and CAD, while safe-haven FX such as JPY and CHF (and gold) tend to do well.
Given that the coronavirus outbreak so far has mostly affected China, leading to widespread economic disruption in the country, the currencies of countries with greater exposure to the Chinese economy have tended to be hit worse (such as AUD and NZD).
However, with the virus now seemingly going global (i.e., a rapidly rising number of cases in Italy in Europe), if economies outside of China start to feel similar levels of economic disruption, FX markets will begin to react differently.
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