Coronavirus Uncertainty Sends Shock Waves Across Global Markets
The virus continues to dent investor confidence as well. Last week the S&P 500® index fell 2.1 percent, and the MSCI all Country Ex-U.S. World Index shed 3.2 percent. In Monday trading, stocks on the Chinese mainland fell sharply after reopening following the Lunar New Year closure. The Shanghai Composite fell 7.8 percent, and the Shenzhen Composite fell 8.4 percent. These losses come as no surprise, following the 9.4 percent two-week decline in the Hong Kong Hang Seng index, which remained open. The ensuing flight to safety drove the yield on the ten-year U.S. Treasury note to 1.51 percent, down from 1.68 percent the prior week.
The main question for investors is centered on the economic impact of the virus, both in China and around the globe. Lost activity in production, travel and leisure spending is difficult to quantify, in part because of uncertainty about how long the emergency will persist. Last week, Goldman Sachs estimated the virus would trim first quarter U.S. growth by roughly 0.4 percent, mostly through tourism and trade. The impact on China’s growth will, of course, be more severe. The Lunar New Year holiday was officially extended, resulting in lost productivity for several days. Some provinces have extended the holiday to February 10, meaning more businesses will remain closed beyond the official February 3 resumption of economic activity for essential sectors. Based upon certain assumptions, Evercore ISI estimates that first quarter Chinese GDP could be zero, or even lower, compared to the 6 percent pace of last year’s fourth quarter, with full-year growth falling to 4.5 percent from last year’s 6.1 percent pace.
The central bank on Monday injected funds into the banking system while also lowering the interest rate, to ensure “ample liquidity.” For what it’s worth, China reported stable and modestly expanding manufacturing activity in January. But that is old news, as the virus outbreak occurred late in the month and the larger impact will be felt in February.
It’s Too Soon to Quantify the Impact of the Coronavirus
What the impact on the global economy will be remains to be seen. Prior to the virus outbreak, there was gathering evidence of an upturn in activity, predicated in part on improvement in China. Europe being more heavily exposed to trade, was anticipating improvement following the phase one trade agreement between the U.S. and China, and a clarified timetable for Brexit. But that expected improvement may have to wait. The virus is expected to be a temporary headwind. Although some economic activity will be lost and never recovered, it is expected that most will eventually rebound. Of course, that remains to be seen and the timing remains uncertain. In the meantime, the drag on activity remains. Bloomberg reports models showing an estimated 0.1-0.2 percent hit to European growth in the first quarter. This follows last week’s report that Eurozone growth fell to 1.0 percent in 2019, although some of that weakness was due to a fourth quarter contraction in France because of widespread strikes in protest of proposed pension reforms. Nevertheless, the full-year growth rate for the Eurozone was down from 1.2 percent in 2018, and the slowest pace since 2013 (according to Bloomberg).
The Result of Brexit is Minimal for Now; Investors Watching Q4 Earnings this Week
The U.K. officially exited the European Union last week. And while everyday life will feel largely unchanged initially, the clock is ticking. Prime minister Johnson has vowed to complete negotiations with the E.U., including a complicated trading relationship, by year-end, an aggressive timetable.
In the U.S., fourth quarter earnings season is in full swing. Roughly half of S&P 500 companies have already reported, with results running 4.1 percent ahead of expectations, according to Factset. This leaves the aggregate blended forecasted rate at -0.3 percent, still negative year-over-year, but an ongoing improvement compared to expectations at the start of the reporting season. Roughly an additional one-fifth of the index will report this week, including Alphabet, Disney, Ford, Yum China Holdings, GM, Qualcomm and Twitter.
And on the economic calendar, both the flash and ISM manufacturing indices are scheduled for Monday, followed by service sector activity reports on Wednesday. More importantly, the January jobs report is scheduled for Friday. The Bloomberg consensus anticipates non-farm jobs growth of 160,000 and an unchanged unemployment rate of 3.5 percent.
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The Standard & Poor’s 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees.
The MSCI ACWI Ex USA Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries. The index targets coverage of approximately 85% of the global equity opportunity set outside the US.
The Shenzhen Composite Index is a market-capitalization-weighted index that tracks the performance of all the A-share and B-share lists on the Shenzhen Stock Exchange.
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- Chief Market Strategist, Ameriprise Financial
- More than 30 years of experience in the investment management industry
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