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Coronavirus Worry Shifts To South Korea. Situation ‘Very Grave’ In Daegu

"We plan to test all believers of that church".

Risk appetite waned a bit on Thursday as fresh virus concerns dominated the headlines during the Asian session and sentiment in European appeared subdued with equities resting near peaks.

South Korea is a source of market consternation, after the country reported its first death and said the number of cases more than tripled to 104 from 31. The country’s fourth-largest city (Daegu) was effectively locked down, after dozens of new cases were traced to services at a local church. The KCDC is describing this as a “super-spreading event”.

Daegu Mayor Kwon Young-jin said more cases are likely, and characterized the situation as “an unprecedented crisis”. Kwon also said that of the 1,000 people who attended the church service in question, around 90 have symptoms. Daegu is just 150 miles from Seoul.


“We plan to test all believers of that church and have asked them to stay at home isolated from their families”, Kwon said. South Korea’s vice health minister Kim Kang-lip called the situation “very grave”.

As Reuters notes, “malls, restaurants and streets in Daegu… were largely empty in scenes that local social media users likened to a disaster movie”.

“Even before reports of the death, ‘shut down Daegu’ started trending on Twitter Korea, with many on social media calling on Moon’s government to isolate the city of about 2.5 million people in a way similar to the Chinese lockdown of Wuhan”, Bloomberg says.

In addition to the highly unfortunate human toll, this is bad news for South Korea’s economy. Weeks ago, I warned that China’s fight to contain the virus could potentially delay the recovery in South Korea’s exports, which contracted a 14th month in January. An early read on February is due Friday.

Late last month, a better-than-expected read on Q4 GDP was welcome news for the global demand bellwether, which was beset by trade concerns for the entirety of 2019. The economy expanded 1.2% QoQ during the year’s final period, the quickest since the third quarter of 2017.

But that’s all up in the air now. China is the country’s largest trading partner, and while shipments to the mainland actually rose in December, they fell 10.5% in January. Exports to Hubei (the epicenter of the virus) comprise just a tiny fraction of the total, but a deep slump in the Chinese economy from the virus could prevent South Korea’s export machine from kicking back into high gear.

South Korea may be the “biggest victim” from China’s factory shut-in, an analyst from Kiwoom Securities in China, told Bloomberg on Thursday, noting that in addition to impacting the country’s export-driven economy, it will also have a deleterious effect on domestic consumption.

The threat to the domestic consumption channel likely became far more grave on Thursday given the news out of Daegu.

Apple’s revenue warning earlier this week underscored the threat to local shares. NH Investment & Securities warned that earnings for Korean suppliers could dive by as much as 20% due to Apple.

The Kospi is on pace for a weekly loss and it did plunge nearly 6% alongside other regional shares during post-holiday trading in Asia the week before mainland markets in China reopened, but it’s certainly not priced for any kind of dramatic escalation in the virus.

Amusingly, virus worries have actually stoked demand for South Korean corporate bonds. “Even as concerns mount that the virus could derail a hoped-for export recovery in Korea, firms have issued 41.4 trillion won ($35 billion) of securities this year through Feb. 18, the most ever for the period”, Bloomberg wrote Thursday, adding that “while an economic slowdown could mean more pain for Korea Inc., investors are focused on the extra yield they can earn on debt of high-rated companies that face little risk of default”.

The won, meanwhile, briefly weakened past 1,200 on Thursday.

“That level has served before as a signal for local exporters to sell USD, meaning the cross has struggled to hold above that mark for any length of time”, Bloomberg’s Whanwoon Choi wrote Thursday. “Whether that pattern repeats remains to be seen, but companies may be less trigger happy as they await [Friday’s] trade data”.


 

3 comments on “Coronavirus Worry Shifts To South Korea. Situation ‘Very Grave’ In Daegu

  1. Lance Manly says:

    They won’t be able to isolate the city the way the Chinese were able to

  2. jyl says:

    In other news, Chinese govt changed definition of “confirmed case” back to only those persons with positive result using test kit, resulting in drop of new daily cases to <400 and no new cases in some cities e.g. Shanghai. Chinese govt is starting to suggest that virus is getting controlled and that county needs to restart business. Govt has likely concluded that economic/human cost of drastic control measures exceeds cost of the virus.

    Meanwhile, virus is pretty evidently “in the wild” in Japan, Singapore, S Korea, and some other Asian countries, including some that are implausibly reporting zero cases (Indonesia, etc), and we’re starting to see public and economic activity beginning to be suppressed.

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