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Coronavirus emerges as a new threat to global markets

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Equities in China and Hong Kong have fallen sharply in recent days as the outbreak of the Coronavirus escalated, but much like the virus itself there has not yet been much contagion elsewhere. However, the situation still needs to be treated with caution. The strong rally in risky assets in recent months has left them vulnerable to some correction, and with the Lunar New Year holiday now underway in Asia there is a clear risk that the virus will spread much further. Meanwhile, it seems inevitable that the virus will put a dent in service sector activity in China and neighbouring countries if individuals abandon travel plans. This comes at a time when the US Democratic party’s primaries are due to get underway in Iowa early next month, raising the risk that a perfect storm could dent risk appetite in the short term.
We hope that the World Health Organisation’s assessment that the Coronavirus is less of a threat than SARS in 2002/03 and the 2013 outbreak of Ebola in West Africa proves to be correct. If this is the case, any pullback in markets may present a good entry point for investors since the lesson from those episodes is that the market impact was reversed once the viruses were contained. Meanwhile, there is still a long way to go in the US presidential election, no matter what the early primaries show.
More generally, the macroeconomic backdrop should continue to offer support to risky assets. Indeed, while valuations look elevated, the new regime in central banking and continued evidence of an upturn in the global business cycle ought to offer some support to asset prices. This is particularly the case for equities, but also in high yield credit markets where spreads could still grind tighter. What’s more, the tone of the ECB meeting this week highlighted that extremely accommodative policy support is here to stay, which may continue to put a floor under asset prices during the next downturn.

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