NEW YORK- U.S. stock index futures nosedived on Monday as investors raced to perceived safe-haven assets after a surge in coronavirus cases outside China stoked fears of a bigger impact to global economic growth.
A rise in cases in Iran, Italy and South Korea over the weekend added to fears of a pandemic. Gold rose to a seven-year high, U.S. Treasuries surged, pushing the 10-year yield to its lowest since July 2017, while the inversion between the 3-month and 10-year yields deepened, a classic recession sign.
On the impact of labelling to 'pandemic': “I’m not sure the labeling really matters. There’s more broad-based concern over the spread. Thus far it has been more contained within China and some Asian countries. I think markets are definitely shifting to a more cautious tone.”
“It’s always a risk. But we don’t have any clear data on what the impact is so far, and a risk is that the data we get is going to be somewhat backdated.”
“Most clients start off asking what we think of the impact of the coronavirus.”
TEEUWE MEVISSEN, SENIOR MARKET ECONOMIST AT RABOBANK
“The over optimism of early last week and the weeks before is being punished now. Clearly, markets in the euro zone did overshoot and now it's reckoning day."
"It seems to be pretty complicated to control this virus. On top of this, China is busy with getting workers back to factories. Which means that when people in China hit the streets again, we could see a reversal of the trends in new cases. The question is, what is China going to do then. Do you choose the economy and take the rise in new cases for granted That’s very important in answering the question: is this the end of the bull market. Today makes it very clear that markets have been very much over-optimistic and that an already weakening economy will suffer quite a blow. Chances have certainly increased that we might on the brink of a reversal of the long-term trend.”
DAVID MADDEN, ANALYST, CMC MARKETS, LONDON “The fear is that the situation is becoming global. The virus seems to be spreading throughout Asia, but also in Europe. There's a lot of fear that this is turning global. This isn't just an issue that's unique to China or even to a province within China. This could potentially be a global issue. And with that, we're seeing anything that's related to China coming under pressure: western luxury brands, mining companies, oil companies; they're all under pressure because of their China connection but also more domestically here in Europe. Airline stocks are being hit as well. The fear is that we could be looking at a scenario where this spreads aggressively in this part of the world too.“
“The fear is that it will get much worse much quicker. The economic impact is difficult to gauge, but it is going to be negative. It wasn't that long ago that the Euro STOXX 600 was at an all-time high. So traders have the perfect excuse to take profits and get out of stocks because it wasn't that long ago when they were at pretty lofty levels. It's extremely difficult to tell what the economic impact is going to be but, by and large, many companies are likely to be negatively impacted by that. And with that, people are going to be doing an Apple and will likely be downgrading their forecasts in the next few weeks.”
NATWEST MARKETS (EMAIL)
"The severity of the market moves, in our view, has been aided by the low levels of market volatility heading into this event."
"And that lack of volatility around many assets, I would argue, continues to be because of the assumption of policy puts around the world. In the US, as we have written, I agree that this Fed has a very dovish reaction function. But also as we have written, this event is unique as a supply shock that monetary policy in my view has little hope of assisting.
Last week we argued that the unique nature of the virus makes some risk assets vulnerable: If a US company (with a certain earnings stream priced in) can’t source inputs because overseas factories are idled with workers sick or locked down in their homes, a fed funds rate at 1.5% or at 0.25% is irrelevant. If that supply shock persists, and leads to demand shortfalls (the US company then idles its workforce), policy can assist, though I would argue it would need to be fiscal not monetary. Admittedly we are not there yet in the US, but it is why you see emergency declarations and promises of fiscal action in places like South Korea. But overall, faith in the Fed bailing out equities should be questioned not because that’s what they tend to do, but because what they can do doesn’t do anything to fix the cause."
(Compiled by Alden Bentley) ((Americas Markets Desk; +1-646 223-6300))