Near-term financial market virus fears will be strong

Significance

More than 80,000 cases have been confirmed in China, and almost 10,000 cases in 68 other countries across six continents. The Morgan Stanley Capital International (MSCI) benchmark world equity index has plunged by more than 10% since February 19. Many investors fled to government bonds, driving the benchmark US ten-year treasury yield to a record low of 1.1%. Heightening investors’ fears, China’s official survey of its manufacturing purchasing managers' index (PMI) fell to a record low in February.

Impacts

• Markets are almost pricing in a global recession but if the outbreak ends by April-June, there is a high chance that this will be avoided.
• US high-yield debt saw the third-largest dollar outflows ever in the last week of February; firms will struggle to access debt financing.
• If the infection rate falls as spring takes hold and temperatures rise in the Northern Hemisphere, this will help curb the outbreak.
• A long correction may be due as stock markets have risen for twelve years, but the length of this drop is highly uncertain.
• Goldman Sachs and JP Morgan have cut their forecasts for US firms' profit growth this year towards zero; more downgrades could follow.