Analyzing important economies for the global markets

Written by VentureXchange

March 26, 2020

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With the global market impact of covid -19, we will analyze the important economies for the global markets. Heading into 2020, there was no shortage of concerns about the global environment. However, the event that no one could expect is the outbreak of covid-19 – a coronavirus. The virus that is now proving to be more infectious and virulent than the common flu.

A doctor from Harvard University, Barry Bloom and director of CIDRAP Osterholm, collectively describe what we know about the virus at this point. The virus spread easily from person to person, and each infected person infects at least 2 more people. A vast majority of infected people show only mild or no symptoms, and people without symptoms can affect others. Given these attributes, Bloom and Osterholm agree that the further global spread is likely. But they also claim that quarantines and control measures can slow down the virus spread. This is important as it will buy crucial time for the medical community to prepare for outbreaks.

important economies cases of covid-19 confirmed
Source: Visual capitalist

At the outset of 2020, the world looked on as China grappled with an outbreak that seemed to be spiralling out of control.

Two months later, the situation is markedly different. After aggressive testing and quarantine efforts, China’s outbreak of Novel Coronavirus (COVID-19) appears to be levelling off.

Global markets sold off sharply and entered correction territory following news of the coronavirus’s spread in South Korea, Japan, Iran and above all, Italy. Safe havens advanced further with US 10-year Treasury yields hitting 1.20%, or close to all-time lows, and Bund yields at minus 0.58%. Gold pushed higher to around $1,635/oz or close to its 2012 high, while copper, the barometer for industrial activity, tumbled 12%.

Looking further out, we will have to assess the real hit to economic growth and company activity. A very tricky exercise at the moment due to a lack of hindsight and the ongoing spread of the virus.

Emerging Market impact of Covid-19

With the MSCI Europe NR down 12.5% at the time of writing, the panic comes at a particularly busy time for earnings reports. Due to market nerves, mean companies escaped unscathed. And to round off the week, tensions between Syria and Russia compounded fears over a pandemic, making it very difficult to navigate markets. But there was some upbeat earnings news. After several profit warnings in 2019, Thalès said its book-to-bill was above 1. Peugeot’s cash generation hit record highs. Sales and free cash flow at Rolls Royce beat expectations. Carrefour’s EBIT in France rose 15%, suggesting restructuring in the country was on track.

The MSCI EM index was down 4.9% mounting fears over the economic fallout from the coronavirus global spread. China postponed its Annual Legislative Meetings due to COVID-19. In addition, the country started implementing targeted tax cuts with VAT exemption for small-scale taxpayers. Meanwhile, other parts of China reduced to 1% from 3%. Beijing also targeted credit and liquidity supply to SMEs.

Source: Goldman Sachs

Datapoints outlined in the chart include trends on coronavirus spread and Brexit negotiations. Covid-19 virus spread clearly presents the danger of an economically disruptive outbreak. With Brexit negotiations, the UK might make enough concessions to secure a zero tariff-free trade agreement before the December deadline.

US – important economies outlook

Toward the end of March, the market response to the coronavirus outbreak entered a new, more concerning phase. Investors seemed to look through the first wave of infections, but it’s changed now that the virus has spread to Europe and the US.

Source: Havar Analytics

Although we cannot predict the path of the virus itself, we do think markets will now need to price a wider distribution of possible outcomes for important economies. Investors should prepare for a longer period of uncertainty and position portfolios for the range of possible macroeconomic assumptions.

Equity markets

For the equity markets and important economies, the expanded set of virus-related impact has led us to reduce our expectations for earnings growth for US companies. With the shifting regional pattern, the virus should have implications for currency markets. The Dollar neutral carry trades generally performed well – suggesting a consensus among investors that the virus will leave the US economy relatively unscathed in 2020. These assumptions now look questionable. Looking ahead, we would expect risky assets to find a floor as the disruption from the virus begins to fade.

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