An epidemiological calamity could bring about an economic oneby Paul Wallace / February 24, 2020 / Leave a comment
Since news of coronavirus first broke at the turn of this year financial markets have behaved perversely. Despite the scale of the new disease in China and its rapid spread to many other countries, equities in America and Europe continued to make gains, reaching new heights last week. Only now do the scales seem to be dropping from investors’ eyes, with steep falls in stock markets on Monday following a reverse on Friday.
There was a rationale of sorts for keeping faith in equities this year even as coronavirus cases and deaths multiplied. China adopted draconian measures to contain the virus in its epicentre Wuhan and the province of Hubei. Recent figures suggested there was a tapering-off in the number of new cases there. Although the virus had spread to around 30 other countries by the end of last week, the number of cases outside China was relatively low, making up less than 2,000 out of a total 78,800 on Sunday, on figures from the World Health Organisation.
If the virus could be successfully contained within and outside China, then any knock to growth would be temporary, with a subsequent rebound making up most of the lost ground. Furthermore, equities would benefit from central banks loosening monetary policy even more. By pushing down bond yields that would boost the attractions of holding shares. This argument was particularly powerful in America because its central bank, the Federal Reserve, has the most scope among developed economies to cut interest rates.
But the equity enthusiasts have been guilty of wishful thinking. The Chinese figures have been suspect from the start. On 22nd January China was reporting 440 cases, but researchers at Imperial College London estimated that on 18th January there were already 4,000 cases in Wuhan. This suggests that the reported total in China could be far too low and calls into question more recent figures showing a decline in new cases.
What has now finally swayed investors is the rapid escalation of cases outside China. In South Korea, the number of cases more than doubled on Saturday, to 433, and reached 833 today. Until this weekend there was only a handful of cases in Italy but the number there has jumped to over 200 today…