The spread of the Coronavirus has prompted a sharp deterioration in risk appetite with equity markets tumbling, which in turn has seen investors seek safety in gold. Alongside this, oil prices have descended into the bear market territory, consequently, pushing global inflation expectations lower and thus markets have repriced the likelihood of continued central bank easing. However, while volatility across various assets has soared, we put these moves into context based on previous virus outbreaks.

EQUITIES

The sell-off across the equity space has been based on the S&P 500 falling over 6% this week. However, the move is not unprecedented given that the index had dropped as much as 12% during the SARS outbreak. Elsewhere, the DAX has been among the most adversely affected with the index plummeting over 8% in reaction to the coronavirus spread, although, much like the S&P 500, with the response not unusual from a virus outbreak, there is scope for further declines.

FIGURE 1. S&P 500 MOVING IN LINE WITH REACTION TO SARS OUTBREAK

FIGURE 2. DAX DROP FROM CORONAVIRUS IS NOT UNUSUAL…. SCOPE FOR FURTHER LOSSES

COMMODITIES

As has typically been the case for gold prices during a virus outbreak, the precious metal has outperformed, even more so than the average having edged towards $1700. The precious metal has also benefitted from the coinciding drop in US yields, which have hit all time lows. Elsewhere, oil prices have posted a sizeable drop relative to previous outbreaks as demand for jet fuel has cratered with China reporting in early February that oil demand was expected to fall over 25%. As such, with the virus continuing to spread across Europe and now hitting the Americas, oil prices remain vulnerable.

FIGURE 3. GOLD OUTPERFORMING HISTORICAL AVERAGE OF VIRUS OUTBREAKS

FIGURE 4. OIL PRICES UNDERPERFORM RELATIVE TO PREVIOUS VIRUS OUTBREAKS