Asian stocks took a battering on Tuesday as the death toll from a virus in China climbed, leaving investors fretting over the widening economic fallout from the outbreak and lifting bonds on expectations central banks would need to keep stimulus flowing.
Outside of Asia, futures pointed to a positive start for Europe and Wall Street but that followed a hefty sell-off on Monday.
In early European trades, the pan-region Euro Stoxx 50 futures and German DAX futures each rose 0.3% while futures for London’s FTSE added 0.1%. The S&P 500 e-mini contracts gained 0.5%.
As the death toll reached 106 in China, the country extended the Lunar New Year holiday to Feb. 2 nationally, and to Feb. 9 for Shanghai. China’s largest steelmaking city in northern Hebei province, Tangshan, suspended all public transit in an effort to prevent the spread of the virus.
With Chinese markets shut investors were selling the offshore yuan and the Australian dollar as a proxy for risk. Oil was also under pressure as fears about the wider fallout from the virus mounted, although futures had bounced from Monday’s lows.
Asian shares too pared some of their early losses on Tuesday but were still deep in the red.
MSCI’s broadest index of Asia-Pacific shares outside Japan slumped 0.8%. Japan’s Nikkei, which was down nearly 1% at one point, closed 0.6% lower. Australian shares ended 1.3% down and South Korea’s Kospi index skidded 3%.
In an indication of the size of losses for Chinese stock markets when they re-open, iShares China Large-Cap ETF sank 4% on Monday. It is down about 10% since Jan 17.
“The wildcard is not the fatality rate, but how infectious the Wuhan virus is,” Citi economists wrote in a note.
“The economic impact will depend on how successfully this outbreak is contained.”
Chinese authorities also may have limited room to stimulate the country’s economy than it had during the 2002-03 outbreak of the Severe Acute Respiratory Syndrome (SARS) virus, another reason investors were jittery.
“The impact on the Chinese economy may be tougher to manage than was the case after the SARS epidemic in 2003 where China adopted expansionary fiscal policy including tax cuts to help the recovery effort,” said Matthew Sherwood, head of investment strategy at Perpetual in Sydney.
Many investors were still trying to figure out the potential impact from the coronavirus, though travel and tourism sectors are expected to bear the brunt of the impact.
“How do we fully price risk, if we have such limited visibility on how bad this could get, not just in terms of contagion, but the impact this will have on economics?” said Chris Weston, strategist at broker Pepperstone.
Analysts at JPMorgan said the coronavirus outbreak was an “unexpected risk factor” for markets though they see the contagion as a regional rather than a global shock.
“The rise in risk aversion and worry of a region-wide demand shock … means the knee-jerk market reaction will likely be to richen low-yielding government bonds,” JPMorgan analysts wrote in a note.
“Concerns about coronavirus contagion has driven yields lower and is the latest risk of a series that have driven U.S. Treasury (UST) yields far below what fundamentals indicate. We remain short 30-year UST.”
Treasury 10-year note yields came off lows after diving as deep as 1.598% on Monday, the lowest since Oct. 10. Yields on two-year paper also fell sharply while Fed fund futures <0#FF:> rallied as investors priced in more risk of a rate cut later this year.
Futures imply around 35 basis points of easing by year end. The Federal Reserve is widely expected to stand pat at its policy meeting this week, but markets will be sensitive to any changes to its economic outlook.
JPMorgan said they have not yet altered their developed or emerging markets forex forecasts though they were taking profits on their “bullish” EUR/USD positions and remain “considerably long” on Swiss francs which benefits from safe-haven demand.
Short build-up in the Aussie was another risk hedge. The currency was last flat at $0.6760 after two straight days of losses.
The euro was a shade firmer at $1.1022. The yen, which has been rising for the past five sessions, dipped slightly to 109.01 per dollar.
In commodities, Brent crude was off 12 cents at $59.20 while U.S. crude eased 2 cents to $53.12.
Spot gold was a shade weaker at $1,579.28.
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