Market Overview

26 February 2020

The virus is no longer uncertain, but a worrying certainty

A month ago, I wrote about the uncertainty that hovered around the coronavirus. Basically, the article stated that the vagueness connected to the situation was great, but that, until then, the virus had barely affected the real economy. From then until now there is only one thing that is certain: its impact is real and its consequences are serious.

If there were about 6000 cases a month ago and 100 deaths in more than 15 countries, now these numbers look very different. Now there are about 80,000 cases in 30 countries and more than 2,600 deaths. This vertiginous rise means that the whole world is alert. The World Health Organisation (WHO) said it was concerned about an increase in cases without a clear link to China and, therefore, asked for urgent funding for countries with weaker health systems. Also, the Chinese President Xi Jinping described the outbreak as the "biggest public health emergency" since the Communist China's founding.

Measures have also been taken at borders. Turkey, Pakistan and Armenia have closed their borders with Iran, as Iran reported more infections and deaths from the virus. This has led to neighboring country Afghanistan, to also introduce restrictions. Austria, on the other hand, faced with the rapid increase in the number of cases in Italy, denied the entry of a train into its country, suspecting that two Italian travelers could be infected by the virus.

There are, in fact, concerns that the epidemic will become a pandemic, however the Director-General of WHO has ruled out this hypothesis for now.

"Does this virus have a pandemic potential? Absolutely. Are we there yet? Not yet ", said the director general of WHO, Tedros Adhanom Ghebreyesus.

In the face of all this alarming news was arose over last weekend, the markets experienced one of the fastest declines after the 2008 financial crisis on Monday. The Dow Jones plunged 997 points, or 3.4%, only at the opening of markets. Moreover, the S&P 500 fell to 3.2%, and the Nasdaq lost almost 4.3%. The CBOE Volatility Index (VIX), which is a measure of market volatility, shot up 40%.

On the Asian side, South Korea's Kospi index (KOSPI) closed down almost 3.9%. With a substantial increase in the number of cases affected by the virus, this was its worst day since October 2018.

In Europe, the Stoxx 600 index, which includes the 600 largest European companies, depreciated by 3.79%, which was the biggest drop since 2016. The virus developments in Italy, led the main market index FTSE MIB to fall by 5.7%, as public buildings and schools were closed and sporting events canceled.

Regarding Portugal, the PSI-20 ended up closing with a sharp drop of 3.53% - that was also its worst day since 2016. All companies closed the day in lower positions, and the Portuguese Commercial Bank (BCP) t contributed greatly for this decrease.

The truth is that many indicators have not yet begun to incorporate the effects that the virus is having. Nonetheless, the negative impact of the virus in the real economy is now certain. The International Monetary Fund (IMF) has decreased its world GDP forecast by 0,1%, however Kristalina Giorgieva, managing director of the IMF, has said that this a baseline and not necessarily the worst-case scenario. Furthermore, a growing number of companies have warned that the coronavirus will stop them achieving the sales targets and the expected profits forecasted for the first quarter of the year.

The biggest rising fear is that the negative consequences will not only impact the first quarter of the year, but also that a deep recession will follow and only end when a coronavirus vaccine is found. It is therefore necessary that all efforts are focused on preventing further spread of the virus, as well as driving economic stimulus in countries that have been affected and, ultimately, finding a vaccine.

There is a study by the congressional budget unit of the United States, which reveals that a pandemic "may produce a short-term impact on the world economy similar to the downturn experienced in the post-war". A similar situation would already be catastrophic; therefore, everything should be done to prevent it.

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Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75.42% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.