Economic fears spreading like a virus

Chris Towner, Director at Chatham Financial comments on the current market turmoil caused by Covid-19 concrens…

The coronavirus is spreading globally and with it, economic fears are spreading also. Fear often comes from dealing with the unknown and it is the unknown scale of the impact of the virus that is putting pressure on the financial markets. For those that have been in the market for a while comparisons are already being made to the financial crisis of 2008 and 2009. Trade and travel are the first targets as restrictions are implemented. This has hit oil as well as share prices and the real question is how much more of a negative impact can this virus have and for how much longer?

In the FX markets, the US dollar has weakened against the euro as proportionately this currency had the most to lose. Attractive interest rates of 2.25-2.50% in the first half of 2019 have now been replaced with rates of 1% and expectations of further 50 to 75bps of cuts. This would bring US rates back down to where they were at the start of the cycle (their historical lows). Compare this with the ECB that has practically no more room to cut rates from its current level of -0.50%. Rates in the euro area have been at these emergency levels for a long time, now forcing the ECB to push back at EU leaders to start stimulating their economies. The coronavirus has been the obvious catalyst for this debate; however, it arguably is too little, too late.
As is always the case with financial crises, the more vulnerable economies such as emerging markets are hit hardest, as well as those economies that rely on oil revenues given oil prices have slumped by 30% over the weekend.
A significant jump in the number of new infections will lead to further volatility, whereas the first signs of containment should give markets a welcome bounce. One thing for certain is that until the outlook becomes clearer, volatility is here to stay.