The impact of the new coronavirus (Covid-19) pandemic continues to play out. The extent to which the virus will spread, both between and within countries remains unclear, and the duration and impact are highly uncertain. Sadly, the human impact continues to grow, and the virus has now claimed the lives of over 22,000 people, as at 25 March 2020.
Increasing numbers of countries now face the prospect of lock downs and ongoing quarantine measures. The effect is likely to result in a severe slowdown in global economic activity, with the risk of stress to a number of sectors.
From an investment angle, the impact on economic activity and financial markets has been significant. Here are a few charts which illustrate the effects so far.
In the US, the impact of restrictions to counter the spread of Covid-19 is starting to feed through to macroeconomic data. Figures released by the US Department of Labor for the week ending 21 March indicated that seasonally adjusted initial jobless claims under state programmes jumped to 3.3 million. This is the highest reading since records began, and dwarfs previous highs, as the chart above illustrates.
Retail sales in China fell by 20.5% year-on-year (y/y) in the combined January-February period, reflecting the impact of the measures taken in response to Covid-19. As the chart above highlights, the measure has not been negative on a year-on-year basis in the last 20 years.
Craig Botham, Senior Emerging Markets Economist at Schroders, said:
“Wherever we look in the Chinese economy, we see double digit declines. Particularly hard hit, as might be expected, has been consumption. Online sales held up better than broader retail sales, with a decline of 3% y/y, but this is still a significant slowdown from the double digit increase recorded throughout 2019. So while online shopping might be expected to prove more resilient than the bricks and mortar variety, even in e-commerce heavy China it is clear Covid-19 still poses a serious headwind.
“Industrial production was not as badly impacted, but this is very much only a relative position. A contraction of 13.5% y/y is still atrocious. Other parts of the non-service side of the economy meanwhile were in some cases worse hit still; fixed asset investment contracted by more than retail sales. This was partly due to a lack of demand, but also because of a lack of workers. Construction is hard to carry out when your workforce is under a mandatory 14 day quarantine.”
The global spread of coronavirus has cast dark clouds over the outlook for global growth. Its impact was initially expected to be limited to one quarter, but as that has been extended, so too have equity market declines and volatility. Europe, now the epicentre of the virus outbreak has seen the sharpest falls in US dollar terms.
Alex Tedder, Head and CIO of Global and US Equities, said:
“While Covid-19 has had a material effect on economic fundamentals – alongside the humanitarian impact – it has been a catalyst for a rapid market re-set following an unprecedented bull market too. This reflects legitimate concerns, present prior to the crisis, about the growth outlook and the sustainability of profits (particularly in the US). In 2019, the market return was mainly generated by a significant re-rating rather than by earnings growth.
“Elevated volatility is not unusual during geopolitical disruption and will undoubtedly continue. More relevant, however, are the underlying drivers of equity returns and the outlook for the likely trajectory of the recovery. For the time being, market moves reflect the fear of the unknown as well as the deterioration in the economic environment and growth expectations. Unprecedented monetary and fiscal stimulus is thus being brought to bear to support economic activity.”
The 10-year US Treasury yield fell sharply as Covid-19 spread beyond China. The recent pickup in yields, which reflects a drop in bond prices, has been driven by a combination of investors liquidating their holdings to release cash, as well as anticipation of fiscal stimulus.
We previously noted the sell-off in commodities prices. In the past month, the failure of Organization of the Petroleum Exporting Countries (OPEC) and Russia to reach agreement on crude oil supply cuts, has triggered a major sell-off in Brent crude prices.
In foreign exchange markets, the sharp increase in uncertainty has led to a flight to safety. As is typically in such an environment, the US dollar has strengthened against global peers. The chart above shows the strengthening in the US Dollar Index, which measures the value of the dollar relative to a basket of other currencies.
Ending on a positive note, the above chart from Schroders Data Insights is more encouraging, as it shows that the number of active cases of COVID-19 in China has fallen materially. The response from the authorities appears to have, so far, been a success in containing the spread of the virus.
Of course, one should not draw the conclusion that the crisis is over for China, particularly as this coronavirus is new, and virologists and epidemiologists continue to try to understand it. There is a risk of new outbreaks, whether that be from domestic community transmission, or imported from other parts of the world where the spread of Covid-19 is ongoing.
It is nonetheless a positive development; China was the first country to record an outbreak of Covid-19 and given the falling infection rates it could be interpreted that China will be the first to recover. As outlined above there is much uncertainty still, but the experience of China will be closely watched.