How Might The Chinese Flu Outbreak Affect Markets?
Last night, the Chinese Health Authority confirmed that the latest strain of Coronavirus, which has broken out in Wuhan, China, is contagious between people. Six have now died, and over 300 are confirmed to have been infected by the virus in China alone. The virus is not just contained to China; 117 are feared to have the virus in Hong Kong and a man was detained in Brisbane.
Chinese Authorities say the outbreak is controllable ahead of the new-year travel season where hundreds of millions of people make journeys for the holidays, but many are sceptical.
For many in the market, the memories of the impact of the SARS outbreak are increasing nerves. Hong Kong fell into recession as a result of SARS, as people feared leaving their houses and economic activity plummeted at the time.
These fears where reflected in global financial markets; the MSCI Asia Pacific Index fell as much as 0.9%, European and US stocks were also lower, as were other risk assets including crude, AUD, NZD and CAD. Havens, meanwhile, JPY and bond were bid.
But are these moves justified? Analysts at Nordea examined how US 10-year treasury yields, the S&P 500, AUD, CAD and the Asian Dollar Index reacted to past high profile breakouts of Swine-flu in 2009, Bird-flu in 2003 and SARS in 2002.
On average, S&P 500 loses momentum after a major outbreak.
Treasury yields dropped in 2 out of the 3 past examples.
The Asian Dollar Index on average rose.
AUD and CAD were usually unaffected.
Going off by precedent then, if this outbreak proves to be as bad as previous similar flu outbreaks have been, the gains in the S&P500 may stall, Bonds in the short-term may rise, while the trends in AUD and CAD should not be expected.
It is worth noting that these outbreaks in the above example coincided with period of economic “reflation”, as in recovery after a downturn, which may distort the picture somewhat.