Pro Perspectives 2/26/20

February 26, 2020

With the new coronavirus cases now growing faster outside of China, we’ll likely see the true multiplicative nature of the virus over the next several days.  

With that in mind, given the disruption to the global economy that will come if we do indeed have a pandemic on our hands, expect plenty of government and central bank intervention.  

We’ve already seen an arsenal of measures deployed in China.  Overnight, the Hong Kong government stepped in with a stimulus package, which included giving each adult resident 10,000 Hong Kong dollars.  And this morning, Germany signaled the likelihood of fiscal stimulus.  That had global financial markets on better footing as we entered the U.S. session this morning.  

But key markets still sit on critical levels, namely the U.S. interest rate market.  The 10-year government bond yield continues to hang around record lows today.  Why does that matter?  As we discussed yesterday, a slide lower from here (below the 2012 and 2016 lows), would be very damaging to market, business and consumer confidence. 

Let’s take a look at what happened to yields and stocks during the depths of the ebola panic back in 2014.  The fear about the prospects for global health were much the same as we’re seeing now.  Here’s how rates and stocks responded (stocks fell about 10%).  

As you can see, both had V-shaped moves, recovering before the peak in new weekly cases.  In the chart below you can see the graphic of new weekly ebola cases back in 2014.  The black box represents the period of decline in rates and stocks.  

But clearly, with the origin of the current virus in China, the world’s manufacturer, it has a very different impact (than did Ebola) on the global economic outlook (pandemic or not). That’s where intervention comes in.  Historically, major turning points in markets are associated with some sort of intervention.  At this point, signs of containment should be the first signal for a bottom in markets.  From that point, tailwinds of global central bank and government stimulus would serve as rocket fuel for markets.  The “when” and “if”, on containment, are the big variables.