Share markets plunged over the last week on the back of a rapid escalation of new COVID-19 cases outside China
The news on COVID-19 has got worse over the last week as it has spread globally, with cases now reported in more than 50 countries. The daily number of new cases outside China now exceeds the daily number of new cases in China raising the threat of a more broad-based disruption to global economic activity well beyond China.
Although new cases may have slowed in Japan and Singapore they continued to surge in Italy, Korea and Iran.
It seems to be only a matter of time before the World Health Organization labels it a pandemic. However, amidst all the gloom there are some positive snippets to note.
Data does not support panic over COVID-19
First, assuming its reliable, the reported data for China offers some hope as it has seen a sharp decline in new cases from the start of February, deaths have also fallen and there are now more recoveries than new cases (see chart).
If other countries are lagging China by a month or so in terms of a sharp rise in the number of cases (see chart) then this holds out the hope that they should be able to bring it under control like China appears to be doing.
Developed countries may not have the ability to implement China’s strict containment measures to the same degree but they are better resourced medically and were forewarned.
Second there is much talk that the true number infected is being underestimated.
This is probable because many may not get sick enough to show up for medical help. If so, the true death rate may actually turn out to be a lot lower.
This is what occurred with swine flu in 2009 which is ultimately estimated to have infected 0.7 to 1.4 billion people globally but with a death rate of 0.02 to 0.04%. Consequently, swine flu did not derail the global economy at the time.
With no sign yet of a peak in the number of new cases outside China, and a high risk of more cases popping up in the US and Australia, uncertainty remains high including in relation to the hit to global growth. So, share markets could still fall further in the short-term.
However, here are five points are worth noting:
- Share markets were already at risk of a correction given the strong gains from their last greater than 5% fall into August last year and COVID-19 has clearly provided a trigger and explains its severity.
- From a purely technical point of view it’s premature to conclude we have hit bottom yet – but markets are very oversold, the US share market managed to bounce off technical support from August lows on Friday, the VIX (or fear) index has spiked to levels last seen at the time of the last major fall in share markets into December 2018 (when US shares fell 20% and Australian shares fell 14%) and put/call ratios have spiked higher. So, we may be getting close to the capitulation by investors often seen at market bottoms.
- The experience of the Chinese share market is instructive. It fell 12% to its early February low and before turning up again as the number of new cases in China peaked, all of which sounds like what happened around SARS.
- Share markets are now very cheap again given the 10% or so plunge in prices and the plunge in bond yields. Valuations are no guide to short-term timing but when they are attractive they tell you there is rising potential for a rebound.
- Policy stimulus is ramping up beyond China with fiscal easing in HK and Singapore, talk of more in Europe and the Fed signalling another rate cut. Fed Chair Powell has signalled that “the coronavirus poses evolving risks” which the Fed is “closely monitoring” and “will use our tools and act as appropriate.”
Therefore, a 0.5% rate cut is looking likely at the US Federal Reserve’s mid-March meeting. Even Australia looks to be heading in the direction of fiscal stimulus, albeit very slowly, and we now see Australia’s Reserve Bank cutting this Tuesday.
Policy stimulus won’t stop the spread of the virus but it will help supercharge the eventual recovery in global growth and share markets.
US shares fell 11.5% for the week, Eurozone shares fell 12.4% and Japanese shares lost 10%. Chinese shares fell smaller 5.1%, possibly because the number of new cases in China has slowed and the Chinese share market already saw a 12% plunge into early February. Australian shares followed the global lead and saw a 9.8% fall with IT, energy, retailers and materials seeing the steepest falls.
From their recent highs US shares have fallen 12.8%, Eurozone shares have fallen 15.8%, Japanese shares have fallen 12.2% and Australian shares have lost 10.1%.
The retreat to safety and expectations for more monetary easing saw bond yields fall to new record lows in the US and Australia. Commodity prices also fell as did the Australian dollar although this was limited by a fall in the US dollar.
At one point the $A fell to $US0.6434, but managed to end the week at $US0.65.The plunge in the $A by making Australia more competitive internationally will act as a shock absorber for the blow to exports from the COVID-19 outbreak.
Dr Shane Oliver is Head of Investment Strategy and Chief Economist, AMP Capital