Risk assets prices such as equities started the year at a fast pace. Before the coronavirus outbreak unsettled investors, global equity prices had risen by more than 10 per cent in 3 months while credit spreads (the spreads of corporate bond yields over government bond yields were at a record low -making it attractive for corporates to borrow at low rates).
The coronavirus gives us some obvious market winners and losers. The losers include:
Stocks/equities in general – but Airline stocks in particular, as consumers travel less. Asian airline Cathy Pacific has asked its staff to take 3 weeks unpaid leaves to control its costs as many planes are grounded.
Oil – with travel in China particularly reduced, but also the potential for Chinese industrial production to be affected. With oil prices down 20% from recent highs, should such a move be permanent this may force OPEC and oil allies e.g. Russia to cut production to force prices higher.
Multi-national companies e.g. Starbucks, Walt Disney who have closed outlets in Asia.
Companies who have a supply chain linked to China e.g. Apple
Government Bonds (Prices up /Yields Down) as investors flock to the safety of government debt (the US Government is always going to pay you your money back). 10-year US bond yields have fallen from 1.70% Yield -to-Maturity to 1.63 YTM).
Gold – the yellow metal is another ‘safe haven’ asset. In times of trouble, when investors are in ‘risk-off’ mode gold does well.
However, the financial market reaction to the virus is controlled, not drastic, and indeed equity prices have rebounded over the last few days as investors are betting on China bringing the situation under control. But until there is clear evidence of the outbreak subsiding, market sentiment will remain fragile.
US Interest Rates
At the first Federal Reserve (FOMC-Federal Open Markets Committee) meeting of the year in January the key US Federal Funds Rate (the rate banks lend excess reserves to each other on an overnight basis and a key rate affecting the money supply / bank lending activity) was left unchanged at 1.50-1.75%. Some market participants think there will be no Fed Funds change this year after the 3 x 0.25% cuts last year. This indicates the Central Bank is comfortable that the US economy is growing neither too fast nor too slow. US unemployment is at a 50-year low of just 3.5%, perhaps the natural ‘full employment rate’. The Fed is delighted with this.
US China /Trade Talks
This will be a key subject for financial markets this year. “Phase One” of an agreement was signed by the two super powers in January which the markets were delighted with but this initial deal is limited in scope and there are lots of tough talks ahead. Many institutional investors/fund managers see this subject as the ‘No.1 Risk Topic’ for the markets this year – whether global trade moves to a more or less protectionist state. The latter could lead to a global economic slowdown. But the news is good at the moment with China, this week, saying it would halve tariffs on some US imports, which looks like a significant descalation of tensions. Global stock prices welcomed the move.