Investors are bracing for more market turmoil this week as uncertainty swirls over the spread of COVID-19 and the impact it is having on the global economy.
About 85,000 cases of the coronavirus have been reported globally. The virus has killed at least 3,000 people, the vast majority in China. Several countries, including the Czech Republic and the Dominican Republic, reported their first cases over the weekend, while Australia, Thailand and the United States reported their first deaths.
Stock markets in Canada and the U.S. are coming off their steepest declines in more than a decade. Last week, the S&P 500 fell by 11.5 per cent, and the S&P/TSX shed 8.9 per cent of its value, the worst weekly showing for both indexes since the depths of the 2008 financial crisis. Based on intraday levels, the TSX had already fallen more than 10 per cent over the past six trading days.
Both indexes are firmly in correction territory, with Canada hitting that level in a quicker time period than ever before. (A correction is a decline of at least 10 per cent.)
The pressure on stocks is being driven by fears that COVID-19 may end up having a much more damaging impact on the global economy and corporate profits than first feared.
“The coronavirus is in many ways a black-swan event, one that we couldn’t see see coming, and one that is exceptionally difficult to measure," said Frances Donald, global chief economist with Manulife Investment Management in an interview.
“It launches us into a period of extreme uncertainty.”
The term “black swan” was brought into the public consciousness more than a decade ago by former trader Nassim Nicholas Taleb, who penned a best-selling book of the same name. He described a black swan as an event that is highly rare, impossible to predict, but one which can cause catastrophic damage.
Now, a growing number of economists are throwing their past predictions about the impact of COVID-19 out the window, and realizing that the world is heading into the great unknown.
“We have no ability to understand the length of this crisis,” Ms. Donald said.
COVID-19 differs from some other deep financial shocks in the past, she added, because it is affecting both the supply and demand side of the global economy, limiting our ability to make things, and ability to consume things.
On the weekend, there was more evidence that the virus is having an increasingly detrimental effect on China, the origin of the outbreak and home to by far the largest numbers of cases and deaths.
The Purchasing Managers’ Index (PMI), which measures factory activity, plunged by a record amount in February to 35.7 from 50 in January, with many manufacturers forced to shutter factories to try to contain the spread of the virus. Many economists predict that China will contract in the first quarter and eventually tip into recession. (A recession is two quarters in a row of negative GDP.)
In Italy, the hardest hit European country where there have been roughly 1,600 cases of COVID-19 and 34 deaths, Economy Minister Roberto Gualtieri told an Italian newspaper that he plans to announce a stimulus package worth US$3.5-billion this week that will go to both industry and the country’s health service. Companies that experience a 25-per-cent drop in revenue due to the virus will be eligible to receive tax credits.
“I want to reassure Italians that we are well aware of the problems and dangers,” Mr. Gualtieri said in an interview with La Repubblica.
If more financial aid is needed, it would have to come from the European Union, he added.
U.S. Vice-President Mike Pence sought to reassure people in a television interview on Sunday, saying on NBC’s Meet the Press that “the fundamentals of the economy are strong,” and that the stock market “will come back.”
Amid the panic selling last week, there were few safe havens, with even gold bullion, traditionally a shelter in times of turmoil, falling sharply in price.
“The dislocation in equities, and a further slide in commodities, has ratcheted up odds of major interest-rate cuts by central banks and fuelled an already raging global bond-market rally,” wrote Douglas Porter, chief economist with BMO Nesbitt Burns Inc., in a note previewing the coming week.
The yield on 10-year U.S. Treasuries fell to a record low of 1.17 per cent, a 30-basis-point drop in the past week. In Canada, the comparable 10-year yield dropped to 1.1 per cent, a little above the 2016 record. Yields and prices move in inverse direction in the fixed-income market, meaning investors who bought bonds made swift returns last week.
The Bank of Canada will make a rate decision on Wednesday, with the bond market pricing in an 82-per-cent chance of a 25-basis-point cut.
Manulife’s Ms. Donald says she believes the decision is likely the most debated internally in recent memory, with the BOC on one hand open to a cut because of the stimulus it might bring to the economy, but on the other hand weary of adding to indebtedness, and exacerbating unaffordability in the housing market.
“I suspect the BOC will do their best to hold on Wednesday, but they are likely to send a message that if that hold is insufficient, they will step in as much as possible [at a later date]," she said.
With reports from Reuters and The Associated Press
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