HH Coronavirus: A Black Swan Event For Global Equity Markets

Recent data released from China corroborate this calculation: China PMI releases are at their lowest levels on record. The manufacturing indicator dropped to 35 while services plummeted to 29, much lower than 2008 levels. We will monitor the impact on the upcoming data in our Growth Nowcaster on a daily basis, to determine whether it will be a deep, long lasting shock, or a short-term dip.

For now, we do not see a major recession arising from the spreading of the virus, but rather a marked slowdown followed by a recovery.

Sentiment has been in the driver’s seat and has become significantly more bearish. Outflows from risk assets have been gigantic, with at least USD 20bn pulled out of equity mutual funds and ETFs in the last week of February, and more than USD 5bn out of major credit funds. Systematic deleveraging took its toll as volatility exploded, sending risk appetite all the way from extreme optimism into despair and extreme pessimism.

Valuations have seen a correction, especially for growth-related assets. However, they remain well above their historic average. For example, if we look at the Shiller’s CAPE ratio, it is still at around 30, lower than in the dotcom bubble, but well above 2007 levels. Finally, an important part to sentiment stabilization will need to come from central banks, who have already tried to reassure regarding the future path of economic activity and their intention to act if necessary. As an example, in an emergency move on March 3, the US Federal Reserve cut interest rates by 50bps. We are likely to see further easing globally.

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