The only thing stopping markets from another down week like last in is fiscal and monetary stimulus. But not in China. It”d have to come from the advanced economies.
The total number of coronavirus Covid-19 cases is going to 100,00 this week. And even though the number of new infections in China, where all hell broke loose in December, is now surpassed by the number of recoveries, a worsening outbreak in South Korea and Italy, coupled with the first death in the U.S. on Saturday, does not bode well for the start of this week’s trading session.
Whether investors recall Friday afternoon’s words by Fed chairman Jerome Powell about being vigilant will remain to be seen until the futures markets are open.
Fears of a global pandemic, though, have not subsided.
Twenty-nine people have died in northern Italy because of the mysterious, fast spreading coronavirus. That’s a mortality rate of 2.5%. Italy is home to the third largest number of fatalities caused by the virus, trailing only Iran and China, the epicenter of the outbreak.
Markets are repricing everything lower. Companies are warning about first quarter earnings.
News of outbreaks outside of China have challenged the narrative of an epidemic largely contained within China. Italy and Iran are perhaps the biggest problems.
Italy is quickly spreading it throughout the EU due to weak border controls. Germany has seen its number of cases nearly double in 24 hours. France’s case load has more than doubled and has surpassed Germany’s. They now have 100 cases and two deaths.
This weekend’s passing of a coronavirus victim in Washington state could easily prompt President Trump to make good on his recent threat to ban American airlines to fly to and from South Korea and Italy. Delta, United and American already suspended all China flights. Delta suspended some Seoul flights last week and all are allowing passengers to cancel trips to Italy without penalty, depending on booking period.
The number of cases outside of China now appears to be on a troubling trajectory that more closely resembles the initial spread within China. It wasn’t more than a month ago that China had 3,000 cases. Now South Korea does. Mainland China now has around 80,000 cases, accounting for more than 92% of global cases.
Last week’s market sell off implies a meaningful intensification of downside risks as authorities grapple to contain contagion that will likely lead to quarantining thousands of people, school closings, and the possibility of business shut downs and travel restrictions inside of countries. Northern Italy is on lockdown.
The emergence of additional unexpected clusters in Europe and in California seems more likely than not this week.
In China, high frequency data points to economic fallout that has been close to the market’s worst-case scenario. Even if China looks to bring production back online in the coming weeks, the disruptions so far has everyone lowering their expectations.
Barlcays Capital economist Christian Keller says he expects a 8.9% quarterly contraction in China, followed by a bounce back to double-digit gains through the remainder of the year thanks to targeted stimulus measures designed to achieve annual production targets.
However, even with this expected rebound, China’s annual growth in 2020 would still only add up to 4.9% this year, which Keller has already lowered by 0.5 percentage points from an earlier forecast.
“This downgrade weighs on growth elsewhere,” he says.
BarCap now sees euro area GDP slipping 0.1% quarterly and similar paltry growth rates in Asia and Latin America economies.
“Without near-term evidence that the virus has been successfully contained, the risk to our current growth forecasts outside China is firmly on the downside,” Keller says.