Manufacturing Data to Provide Telling Insights into the Impact of the Coronavirus

Abiding faith in the transitory nature and the economic impact of the coronavirus continues to push global equity averages higher. The MSCI All Country World Index climbed 1.1 percent last week, bringing its year-to-date gain to 2.3 percent, but more tellingly, it has risen 3.8 percent in the first two weeks of February despite the continued spread of the virus. The S&P 500® index climbed 1.6 percent last week, bringing its year-to-date gain to 4.6 percent, with 4.8 percent of that coming in February. It has been a similar story in Europe, despite abysmal fourth quarter economic data, especially industrial production and overall GDP. Even in China, the Shenzhen Composite index is higher by 14.1 percent since reopening on February 4 following the Lunar New Year holiday, while the Shanghai Composite is higher by 8.6 percent. Crude oil also rose last week, along with copper. Bond yields, in contrast, were unimpressed, as the yield on the ten-year Treasury was unchanged at 1.58 percent. 

Investors Seem Optimistic—Is it Justified?

Stocks enjoyed their strongest week of the new year last week. A combination of promising economic data, optimism regarding the spread of the coronavirus, relatively modest declines in Chinese equities, and the end of the impeachment process in Washington led to a 3.2 percent gain in the S&P 500® index. Stocks in the Eurozone were even stronger, as the EuroStoxx 50 index surged higher by 4.3 percent. In China, the Shanghai Composite index fell 3.4 percent on the week, a comparative victory as trading activity resumed following the Lunar New Year holiday. Bond yields climbed as well. The ten-year Treasury yield rose to 1.58 percent from 1.51 the prior week. High yield credit spreads narrowed sharply, falling to 375 basis points from 403 the previous week. And the dollar rallied, as the DXY dollar index climbed from 97.4 to 98.7, its highest level since October.

Coronavirus Uncertainty Sends Shock Waves Across Global Markets

The coronavirus continues to spread. Over 17,000 cases of infection have now been reported, along with 361 deaths, the vast majority in China, although infections have also been reported in 23 other countries.

Markets React to Worries About the Economic Impact of the Coronavirus

Worries about the economic impact of the coronavirus caught up with global equity markets last week. Last Thursday, China’s Shanghai Composite index fell by 2.8 percent and the Shenzhen Composite shed 3.5 percent, before both subsequently closed for the Lunar New Year holiday. But some of that same fear shifted to the U.S. on Friday, as the S&P 500® index dropped 0.9 percent. As this week gets underway, the Japanese Nikkei index has fallen 2.0 percent, stocks in Europe are down in excess of 2.0 percent with several hours to go in the trading session, and U.S. futures are pointing to a sharply lower open. Futures on the FTSE China A50 index are down 5.7 percent in Monday trading.