Markets mainly moved last week in response to news about the spreading coronavirus and the fallout this may have on Chinese and global economic growth. Leading equity indices pulled up by between 4% and 5% relative to the previous week, encouraged by signs of containment, news of a vaccine in the works and finely calibrated monetary and fiscal measures by Chinese authorities. The People’s Bank of China last week announced it was injecting 1.7 trillion yuan into the banking system for lending to companies and cut the short-term funding rate for banks. Beijing also reduced customs duties on USD 75bn worth of US imports. Also contributing to the positive mood was the fact that many companies beat sales and earnings estimates.

But the enthusiasm died down as the weekend approached as investors feared having become complacent. It is still too early to gauge the impact of the coronavirus on global economic growth. Yet in China, it will certainly dampen the uptrend in manufacturing indicators and consumer sentiment, both of which had been improving moderately. And then, the Chinese economy is far more tightly integrated into the global economy than at the time of the SARS epidemic in 2002 and 2003. Services are more preponderant in the Chinese economy, and it will take time before production output is back to full swing. Gaps have opened along supply and selling chains, leading to store closures. Stoppages have hit the tech and automotive industries especially hard.

Factory orders in Germany fell by a sharp 2% in December whereas a 0.6% increase had been expected – a sign of how exposed the European economy is to any deviation in Chinese demand. In the US, job creation figures for January were encouraging. The 225,000 positions added were 65,000 higher than expected. This coming Friday, retail sales for January will show whether consumers are as chirpy as ever. Last month inflation in China hit an eight-year high at 5.4%, with the price of food surging by 20.6% year on year, accelerating in response to measures to stamp out the epidemic.

Jerome Powell’s congressional address this week on the state of the economy will be watched closely to see if the novel risk to the economic outlook represented by the coronavirus will lead him to depart from his neutral message on monetary policy. The drop in the 10-year Treasury yield to 1.6% would suggest that the market expects a series of rate cuts.
If you have any questions please contact the office on (03) 9670 6070.