Global Fears Escalate as Virus Weighs on Economic Growth

January 28, 2020

| Fullerton Markets

Global Fears Escalate as Virus Weighs on Economic Growth">

As risk-off mode may continue to stay, gold and yen may be your best bet.

Concern about the coronavirus intensified as the tally of infections jumped over the weekend

Investors around the globe stepped up their retreat from stocks and many commodities, reflecting intensifying fears that a viral outbreak in China will deliver a fresh setback to the outlook for world economic growth.

On the first trading day of the week, the Dow Jones Industrial Average posted its fifth consecutive daily decline, dropping 453.93 points, or 1.6%. The S&P 500 also declined 1.6%, its first drop of more than 1% since October. Meanwhile, the yield on the benchmark 10-year Treasury note fell to 1.605%, its lowest level since October, a signal that investors are eschewing risk as they reconsider an outlook that just recently had been brightening. The CBOE Volatility Index, which measures expected moves in the S&P 500 index, also climbed to its highest level since October.

It’s probably too early to determine the impact on global growth from the outbreak of this virus, which is probably the key uncertainty. Concern about the coronavirus intensified as the tally of infections jumped over the weekend. The virus has infected more than 4,000 people and killed at least 100, mostly in China’s Hubei province. It has spread to other countries including the US, Japan and South Korea, and public health officials have warned that it is growing more contagious.

Shares of tourism-related companies and those with ties to China were among the hardest hit, after the country imposed travel restrictions in response to the outbreak. It reminded investors that this market can turn on a dime, should it start to question what was causing it to go higher.

The sharp sell-off jolted an equity market that had been unusually calm. The S&P 500 hadn’t logged a daily rise or fall of more than 1% since October. It also hadn’t suffered two consecutive daily declines since December 10.

Many core services to China’s consumer boom are grinding to a halt as people forgo plans to spend money during the country’s biggest annual holiday, the Lunar New Year, that began Saturday. Local authorities in some parts of China have ordered theatres, museums and other venues to shut down. Wuhan halted public transportation in, out and around the city, and more than a dozen other cities in central China have since followed suit.

The broad stock market index, S&P fell 51.84 points to 3243.63, weighed down by losses in all 11 sectors. The energy, technology and materials sectors, all of which are sensitive to China and any growth-related fears, dropped more than 2%. US stocks have steadily risen since mid-October when the Trump administration indicated it was nearing a phase one trade deal with Beijing. Meanwhile, improving economic data and three interest rate cuts by the Federal Reserve eased fears about a manufacturing slowdown bleeding into the broader economy.

Still, it is too soon to make portfolio changes based upon the outbreak. Investors would be well served to stay on course and remain well diversified.

Our Picks

EUR/USD – Slightly bearish.

This pair may drop towards 1.1095 this week as the Fed will hold rates.

EUR/USD – Slightly bearish.