A Global Pandemic – COVID-19: Markets React Differently to Outbreak

Background information: The latest deadly coronavirus outbreak was initially detected in the Chinese city of Wuhan, in Hubei Province. On January 30, 2020, the WHO’s Health Regulations Emergency Committee (HREC) moved swiftly to declare it a public health emergency. The virus itself is fairly common in certain species of animals including bats, cats, camels, and cattle. On the odd occasion, the virus can spread between species, as evidenced by the deadly SARS virus and MERS viruses.

The virus’ genome (its genetic structure) was quickly identified and shared in the GenBank so that other health organisations around the world could identify it. While it is still early days with respect to the COVID-19 virus, its predecessors, SARS and MERS were associated with high mortality rates of up to 10%. COVID-19 is currently hovering around 2%. The virus remained unnamed until February 11, 2020 when the WHO (World Health Organisation) renamed it COVID-19.

The Impact of the Coronavirus on the Financial Markets

Source: Refinity/Datastream/ Johns Hopkins CSSE

The most devastating economic effects of the coronavirus occurred in January 2020. While the full impact has yet to be realised, there are ongoing shocks in the markets. Stock prices for the MSCI China, Hang Seng, MSCI All Country Indices started tanking as reports of increased incidences of coronavirus outbreaks made waves. This reached a peak towards the end of January 2020, and into the first week of February 2020. The number of coronavirus confirmed cases quickly rose from around 3,000 on January 24 – 27, to over 25,000 by February 5. In that same time, global markets reported losses of between 2% – 8%.

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 This is clearly reflected on the above chart. After the spike in coronavirus cases, markets began the slow and painful process of recovery. That the People’s Bank of China (PBOC) and other Chinese government agencies moved swiftly to stabilize the Chinese economy helped dramatically shore up financial markets. The PBOC implemented quantitative easing to the tune of $174 billion and instructed all banks across China to maintain low interest rates, government businesses to reduce rentals, and for widespread construction projects to be implemented across China. This, while containing the coronavirus outbreak in Hubei Province around the city of Wuhan.

The virus was relentless in its effect on financial markets, with notable improvements in the performance of several industries including traditional medicine and pharmaceuticals, medical equipment, facemask manufacturers, and detergent companies. Naturally, travel, tourism, airlines and luxury consumer goods ticked downward after the outbreak. Major Asian airlines such as Cathay Pacific have reduced their capacity in Q1 2020, with tens of thousands of workers being laid off with unpaid leave as airlines attempt to mitigate losses through reduced travel.

The decrease in global economic activity is notable in the aforementioned stocks, notably the following: China Southern Airlines, Cathay Pacific Airlines, China Eastern Airlines, Giordano International, Cafe de Coral International, and others. That the Chinese central bank moved quickly to inject hundreds of billions of dollars into the economy and simultaneously reduce repo rates has helped to shore up confidence that China is acting decisively to contain the virus and to turn things around.

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How is Gold Performing?

Source: Plus500 Gold CFDs (February 14, 2020)

The performance of gold has been interesting. The current price of the precious metal is hovering around $1578 per ounce on the Comex, with no downward or upward revisions for futures with April 2020 contract delivery. Gold acts as a hedge against global uncertainty and is particularly bullish when the VIX indicate (volatility index) ticks upward. The price of gold over the past 52 weeks has not reflected too much variance around the mean. The 52-week low is $1302.40, and the 52-week high is $1619.60. Clearly, gold is at least $40 off the high, indicating that market volatility is not sufficient to warrant an all-out panic and a switch from equities to gold. Traders are actively engaging in several different gold markets as hedges against stock-market fluctuations.

Among the many options available are gold ETFs, gold stocks, physical gold bullion, and even gold CFDs on Plus500. The latter option is a derivatives trading product whereby traders purchase contracts for gold, without actually investing in companies or the precious metal itself. These derivatives trading instrument (contracts for difference) allow traders to go long or short on the precious metal. As news of containment hits the mainstream, the number of traders investing in gold declines, as evidenced by speculative sentiment. Currently, there is a net ‘buy’ sentiment among gold traders, but only marginally so. Gold tends to shine when stock markets falter, and it serves as the ideal risk mitigation investment when the chips are down.

Current Levels of Global Bourses

Source: Bloomberg Global Stock Markets During COVID-19

By Valentine’s Day 2020, the number of deaths had already reached 1380+ with tens of thousands of infections. The 1-month performance of American stock markets has been positive, with the following reported growth rates:

  • The S&P/TSX Composite Index – +2.70%
  • NYSE Composite Index – +0.44%
  • NASDAQ Composite Index – +4.98%
  • S&P 500 Index – +2.77%
  • The Dow Jones Industrial Average – +1.67%
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Across Europe, Africa, and the Middle East, the 1-month gains are all positive, except for the FTSE 100 Index which is down 2.24%. In Asia, markets are less ebullient. Notable declines have taken place on the Hang Seng Index which is down 3.70%, the CSI 300 Index which is down 4.82%, and the TOPIX Index in Tokyo which is down 2.16%. The Nikkei 225 Index is down 1.41% and the MSCI AC Asia Pacific Index is also down over 2%.

Many financial planners and investment consultants recommended diversified portfolios during times of geopolitical uncertainty. Stocks tend to take the biggest hit when speculators get scared. Gold and other safe-haven currencies like the JPY, CHF, and to a lesser degree the USD tend to perform better than stocks, although this is not cast in stone. For now, containment is helping markets to stabilise and gold is slightly net bullish.

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