Nobody Say ‘Spanish Flu’

A palpable sense of angst remains entrenched in markets as COVID-19 infections continue to rise in South Korea, Italy and Iran.

The number of cases in South Korea rose to more than 1,000, up from just 50 last week, and the won weakened to the worst levels against the dollar since 2016. Korean stocks slid.

In Italy, a dozen people are now dead from the disease. And Greece confirmed its first case. Iran’s death toll rose to 19.

Standard Chartered is warning on the growth outlook for Gulf economies, Moody’s cautions that global auto sales will fall more than twice as much as they previously expected, and through three weeks in February, China auto sales are down 83%. Vietnam warned that manufacturing sector growth in Q1 would slow to just 6.28% YoY versus a previous forecast of 10.47% if the outbreak persists until the end of next month. And on, and on.

“More expansionary monetary policy is expected globally, although central banks cannot deaden the supply-side disruptions caused by the COVID-19 outbreak”, AxiCorp’s Stephen Innes said Wednesday, adding that when it comes to the demand side, “the impact is negative but to an unquantifiable degree, apparently suggesting that some central banks may prefer to wait before cutting rates [although] this could be a mistake as they can’t possibly take the chance for this thing to get worse”.

The FTSE 100 wiped out its election gains on Wednesday, sinking to its lowest in more than a year thanks to a three-day drop in excess of 6%. “So much for the Boris bounce as concern about a global demand shock wipe out all the post-election gains on the U.K. stock market”, one analyst lamented, in an e-mail to Bloomberg.

“Interestingly, EM currencies have been stable in the past two days, in part because they moved well before the collapse in equities for instance, but also because CNY can act as anchor if policymakers maintain a stable daily fixing”, SocGen’s Jason Daw remarked.

The Stoxx 600 hit its 200-day moving average on Wednesday amid a grievous multi-day slide. The gauge bounced a bit, but if it sustains a drop below the last line of support, chart-watchers would probably tell you that August levels could be in the cards.

The VStoxx, meanwhile, is just a damn hockey stick.

Analysts are understandably concerned, while endeavoring to maintain a tone that doesn’t admit of too much in the way of panic.

“It appears a question of when —rather than whether— the COVID-19 epidemic will be declared a global pandemic”, Rabobank’s Stefan Koopman and Michael Every said Wednesday, in a new special report, adding that “as policy makers chase a moving target, there is an increasing interest in the 1918-19 Spanish flu, and there are indeed some similarities in terms of virulence, infectiousness, and the potential attack rate”.

That’s not comforting.

“Anecdotal evidence suggests a similar economic impact both despite and because of changes in society”, Koopman and Every go on to say, before noting that “the key lesson from COVID-19 is the same as with the financial sector: complex interconnected systems greatly increase underlying risks, which are multiplicative and exponential, rather than additive and linear”.