Fears of coronavirus (COVID-19) getting a tighter grip over most countries has triggered a panic across financial markets over the past few weeks. Most analysts have trimmed their growth forecast for the global economy, financial markets have been rattled by the developments.
Global share prices headed for the worst week since global financial crisis (GFC) in 2008 as investors braced for the coronavirus to become a pandemic and rapidly spread around the world. Hopes that the epidemic that started in China would be over in a few months and economic activity would return to normal have been shattered, as new infections reported around the world now surpass those in China. READ MORE HERE
Here’s how leading brokerages have assessed the impact of this health scare on economy and markets.
The overall evidence points to a more significant hit to economic activity in the near term: the risk of a deeper-V in Q1-2020 and of the growth slowdown spilling into early Q2. We have already lowered our Q1 GDP growth forecast for Asia ex-Japan to 3.1 per cent y-o-y, from 5 per cent in Q4, and we expect GDP growth to average 4.9 per cent y-o-y in 2020 versus consensus expectations of 5.1 per cent. The bottom-up evidence suggests risks to our baseline are still skewed to the downside. China’s GDP growth is likely to slide to 3 per cent y-o-y in Q1, from 6 per cent in Q4 2019, and 2020 GDP growth forecast should come in at 5.5 per cent y-o-y (from 5.7 per cent earlier), down from 6.1 per cent in 2019.
Christopher Wood, global head of equity strategy at Jefferies
The Coronavirus continues to drive market sentiment, with “risk off” triggered by the spread of the disease outside China and Asia. The obvious risk for Wall Street-correlated world stock markets is that the virus spreads more overtly into North America. Clearly the hope and indeed still the base case is that the virus, which appears to be an extreme form of viral flu, will burn itself when the weather changes as was indeed the case with Sars. The dramatic flattening of the yield curve this week has again put Fed easing on the agenda with the ten-year Treasury bond yield reaching a record low of 1.24 per cent. This is the reason is why being long Eurodollar futures has been the best way to hedge the Coronavirus and remains so. This market action is also a reminder that, if and when the US does enter a recession, a 10-year Treasury bond yield below 1 per cent is eminently plausible.
Financial markets will go through a period of heightened nervousness that could continue for several weeks or even months. During that period, we expect further drawdowns, but also rebounds, for instance should monetary or fiscal policy measures be announced to offset the economic impact. What is important for the longer-term orientation of portfolios is that we think that the global economy will face a slowdown but will be able to weather this blow. The near-term economic damage will cause companies to revise down earnings guidance, as we have seen in the case of Apple, for example. We think investors should look through these effects and instead focus on the long-term potential of companies to generate free cash flow. Tactically, we maintain our neutral stance on equities. We keep a moderate overweight allocation to commodities, as we think that recent price action in oil markets and base materials already discounts too pessimistic a growth scenario. The most important thing is not to panic.
With the Covid-19 outbreak continuing and quick normalisation of China’s production looking unlikely, we see AxJ 1Q20 GDP growth slowing to 3.7 per cent YoY- 4.1 per cent YoY from 5.1 per centYoY in 4Q19. Policy easing should help to cushion the downturn. US-China trade tension had earlier led Asia ex-Japan (AxJ) — economic region of countries located in Asia, but not including Japan — monetary policy rate to a post-global financial crisis (GFC) low. The AxJ fiscal deficit is now being pushed to its widest after GFC amid the COVID-19 outbreak. Both fiscal and monetary easing are underway, with the 2020 AxJ fiscal deficit expected to widen to 8.4 per cent of gross domestic product versus 7.8 per cent in 2019. We expect AxJ central banks to ease cumulatively by between 0-50 basis points this year
S&P Global Platts
Coronavirus is arguably the biggest risk to global growth since the Great Recession. The rolling geographic nature of the virus’s spread means its duration could be extended into the second quarter. Global oil demand is estimated to grow 0.86 million barrels per day (MMB/D) in 2020, lowered by a massive 0.47 MMB/D vs last month. A vast majority of downward revisions are in China and Asia. Reductions to air and ground transportation in China have badly hit demand for gasoline, diesel and jet. Cancelation and suspension of flights in and out of China also hit jet demand in many other countries. As previous epidemics have shown, it will take months for aviation transport in these countries to return to pre-virus norms.