Markets started the new week in turmoil as the spread of the coronavirus in South Korea and Italy over the weekend rattled investors, and stoked worries that the economic fallout from the epidemic could be far worse than anticipated.
In South Korea, where cases surged to more than 760 as of Sunday, equities plunged nearly 4%, as policymakers convened to consider measures aimed at containing the spread and cushioning the blow to an economy that was waylaid last year by the trade war.
It was the worst day for Korean equities since the October 10, 2018 rout on Wall Street. Volatility surged.
Italy now has 219 confirmed infections, emergency commissioner Angelo Borrelli said at a press conference in Rome on Monday. Five people have died.
He tried to reassure the public. “There is complete safety in our country and people can come here without any concerns”, Borrelli said.
You’ll forgive folks for being skeptical. After all, the country canceled public events and put the north on a complete lockdown over the weekend.
“Current news today suggests risks that the base case is rapidly shifting from ‘Bad’, meaning only China is impacted, to ‘Ugly’, where both emerging Asia and developed economies see soaring infection rates and deaths”, Rabobank’s Michael Every said Monday, before asking whether freedom of movement across Europe is likely to be curtailed:
Once again, we also see what we said we would in our recent virus special report: a “China-style” response: yesterday a train from Venice to Munich was stopped at the Austrian border because of fears that two passengers on board may have had the virus. So much for Schengen?
Italian stocks plunged. The FTSE MIB fell more than 4.5%. It’s shaping up to be the worst day since Brexit for Italian shares.
Remember, Italy is one bad quarter away from falling back into a recession. The kinds of lockdowns imposed over the weekend – while prudent from a public health perspective – could prove economically disastrous.
More broadly, European shares dove more than 3%.
Measured in percentage terms – which you shouldn’t do, although on days like Monday, it makes for “good” doom fodder – the move in the VStoxx is among the largest since Vol-pocalypse.
“Clustering [and] accelerating COVID-19 outbreaks outside of China are driving the next escalation in the ‘risk-off’ trade with European / US Equities, crude and copper pummeled, while USTs, gold, yen and VIX explode higher”, Nomura’s Charlie McElligott wrote, adding that the “the ‘Everything Duration’ theme” is likely to” only accelerates with more defensives over cyclicals”.
10-year US yields tumbled to the lowest since 2016 as the bottom fell out for US equities futures.
Gold, meanwhile, is just parabolic.
This promises to be quite a day on Wall Street. “The challenge is how the market absorbs the current $190B (100th %ile since 2006) NET $ position held by Asset Managers in SPX and aggregate across US Equities Futs (SPX, NDX and RTY) IF they choose to take some off the table”, McElligott said.
Catch up on weekend COVID-19 coverage: