Developments around the coronavirus are evolving at a high pace. While it looks more and more under control in China, Japan and South Korea, the virus is clearly still spreading further globally. Investors are keeping a close eye on the pace of growth of the virus, although the current data is not yet reflecting the measures that most countries have started taking. They are watching for any signs that the new and likely further containment/lockdown measures are starting to have an effect on the spread of the virus. While complacency rates were initially high in Europe and in the US, authorities seem to be grasping the issue and are now addressing it. The next few weeks and months will therefore be crucial in determining whether the spread gets contained, and how deep the resulting economic damage may be.
Most equity markets are down over 25% from their peaks. In fixed income, credit spreads are widening to levels last seen in the 2015 energy/China-related slowdown, while government bond yields have fallen to all-time lows as markets anticipate further rate cuts globally. How deep a possible recession will be remains uncertain and this is what the market is trying to evaluate at the moment. The real economic damage will also depend on further developments, such as the level of effectiveness of emergency measures announced by policymakers.
There is no doubt that the coronavirus is a major threat to human health, as well as a major threat to national and global economic health. However, we continue to believe the coronavirus impact will be transitory and expect markets to rebound in due course. Indeed, central banks and governments are already riding to the rescue, cutting rates and promising fiscal spending to soften the impact of the virus on corporates and consumers.