Stock markets came under further pressure this week. European stocks closed lower. The FTSE ended the week at 6,463, the lowest level since June 2016.
In the US, markets fared better. The Dow closed up on the week 250 points at 25,400. The S&P and NASDAQ held firm. Sentiment had been badly hit by reduced forecasts for world growth from the OECD and the IMF.
The Coronavirus could "halve global growth", according to the Organisation for Economic Growth and Development. "Covid-19 presents the greatest danger to the world economy since the financial crisis of 2008" it said.
The IMF warned the spread of the disease would push growth below the levels of last year. The IMF is to offer a $50 billion dollar emergency fund for countries hit by the virus.
In the OECD's base case scenario, a short lived outbreak, would suggest global growth would slow to 2.4% this year from a previous estimate of 2.9%. In China, growth is expected to fall to 5% this year, from 6.1% last year. Eurozone growth could fall below 1%, a similar scenario, would develop in the UK.
A longer lasting and more intensive outbreak, spreading through Asia-Pacific, Europe and North America could cut growth to 1.5%, the OECD claimed. So what's the outlook ...?
The number of cases of Coronavirus is set to hit over 100,000 this weekend. The good news ... data from the World Health Organisation suggests the crisis has passed in China. The number of cases has dropped to 140 per day compared to 4,000 at peak. The data suggests a 12 - 13 week cycle for the outbreak with a 1% infection rate and a 3.7% adjusted mortality rate. [See our "Say Goodbye to the God of Plague" Chart Update below]
60 million people in the Hubei confined zone presented 68,000 cases and resulted in just over 3,000 deaths. The adjusted mortality rate is less than 4%. Higher than flu perhaps but with a much lower infection rate per 000 of population.
Cases outside of China are highest in South Korea, Italy and Iran. The next week's data will be critical in determining the pattern of expansion. In China, the economy is slowly returning to normal, assuming no secondary wave appears.
In the UK we are moving into the "delay phase". If only we could move winter flu into the warmer summer months. Advice appears to be wash your hands regularly and rinse your mouth with alcohol, preferably vodka. "Nothing to fear but fear itself" was Roosevelt's warning ahead of the Great Recession. Analysis of the data from China would help ...
Fed Slashes Rates ...
In the US the Fed slashed rates by 50 basis points this week. The move planned to ease the crisis in the U.S.A. With just 150 cases reported by the weekend, the Central Bank appears to be moving well ahead of the curve.
Pressure from the White House may have pushed the move. The President was urging action to cut rates in view of the threat of Covid-19. The "Democratic Hoax" Trump claims, assisted his monetary agenda.
For Trump, The 50 basis points is not enough. A further cut would be preferable as zero or negative rates loom. US ten year bond yields fell to 0.7%. Life on Planet ZIRP just became a little weirder.
"The Fed is panicking", claimed Bond King Jeffrey Gundlach. "Once the Fed does a panic cut between meetings, a further cut is likely to follow". "Short rates are headed to zero with a further cut now possible when the Fed meets later this month" the claim.
And yet it was all going so well. The American economy was accelerating, at least since the outbreak began to spook markets. Non farm payrolls increased by 273,000 in February. The number was well ahead of the 175,000 expected. The data for previous months was revised up, bringing the three month average to 254,000 jobs.
The unemployment rate fell to 3.5%. Earnings increased by 3%. The U.S. economy is set to grow by over 2% this year. It is a strange time to slash base rates and push long rates lower.
Markets are unconvinced by the move. Traders have little faith in the ability of central banks to protect economies from disruption. No wonder as travel plans are hit and consumers ease back on spending. The travel and leisure sectors badly hit.
Uncertainty on how far the coronavirus will spread and the impact it will have on the economy is pushing the move away from equities. Gold prices moved higher closing at $1,667. Oil prices Brent Crude moved lower, closing below $46 dollars per barrel. Hand Gel prices on Amazon have reached an all time high ...
Economic Data Bounces ...
In the U.K., the latest PMI data suggests manufacturing activity is increasing, despite some concerns about supply chain disruption.
Construction activity increased in February. The composite index jumped to 52.6 in February compared to 48.4 prior month.
Renewed momentum in the housing market, has led to an increase in housing starts. Companies reported the strongest rise in new orders since December 2015.
The service sector recorded a further increase in business activity in February, albeit down slightly from the high levels recorded prior month. The rate of expansion slowed as the shadow of the coronavirus loomed. Bookings and delays to new projects in Asia featured in the slow down apparently.
Business confidence remains high. Political uncertainty has been eliminated for now. Brexit challenges remain. Problems with recruitment and immigration will persist.
It will be interesting to see what the new Chancellor has in the Red Box next week. Delays to infrastructure spending may well feature ... as the fears for the economy develop.
That's all for this week, have a great weekend. We will be back with more news and updates next week.
The Saturday Economist
John Ashcroft publishes the Saturday Economist. Join the mailing list for FREE weekly updates on the UK and World Economy.
The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.