Published: January 27th, 2020
Asian equities look to soften this week while commodities have experienced downside pressure.
Expect the economic impact to worsen if contagion spreads and severity increases.
Worries for the Chinese economy are growing.
The deadly outbreak of Asia’s coronavirus has dominated headlines going into the trading week.
The disease, which belongs to the SARS family of viruses, broke out in China last week. At the time of writing, 105 people have died after contracting the virus while hundreds more are receiving treatment for infection.
Some 56 million people have been placed under severe restriction as China moves decisively to stop the virus from spreading. One case now in Australia and a third case in Japan, three in France, two in the US. Ninet-seven people have been tested in the UK; all confirmed negative.
Spread of the disease was initially limited to Asia. However, there has been at least one confirmed case in the US, and more have been recorded in Europe and Australia. Experts warn that the virus is mutating quickly and highly contagious.
Aggravating the issue is the busy Chinese New Year season where millions of Chinese travel the globe to see friends and relatives.
News of the virus’s outbreak and spread has had limited impact on forex trading – thus far.
Asian equities have been softer, and commodities have seen downside pressure. If the contagion spreads as experts say it will, the economic impact will make itself felt.
Coronavirus has reminded many of the 2003 SARS outbreak, which caused the deaths of more than 800 people around the globe.
With a mortality rate of around 10 per cent, it sparked enough fear and uncertainty to drag Hong Kong into a recession and slowed Chinese economic growth that year.
SARS was first identified in 2002, with the source of the outbreak traced back to horseshoe bats in China’s Yunnan province. Close to 8,100 cases were reported between November 2002 and July 2003.
Like SARS, coronavirus has crossed the species barrier and is spread via air-borne water droplets. That means humans can infect one another without close contact, raising the threat of contagion.
Its potential impact on the global economy will depend in part on how the virus mutates and the severity of its effect in humans. An illness with symptoms of mild influenza would have limited impact on currency in- and out-flows. A virus with a high mortality rate would be expected to impact economic growth.
At the time of writing, most of the deaths reported have been caused in combination with existing medical problems. Early evidence suggests the elderly are more vulnerable, while children are expected to prove more resilient.
Fear, however, will naturally spread if the death toll rises significantly.
With the two-year-long trade war with the US still underway, there are fears that China may not weather the economic impact of severe outbreak well, potentially impacting the yuan.
If the outbreak worsens, the People's Bank of China (PBoC) will likely commit to further easing as a way to backstop the economy. In a sign of how seriously Beijing takes the outbreak, the city of Wuhan has been quarantined, and the city of Huanggang is likely to be next.
Transport connections have been shut in and out of Wuhan including flights, and the city's train network has also been closed. Citizens have been told to stay home and face masks have to be worn to slow the spread of infection.
With a population of 11 million and 5-day incubation period for the virus, a substantial number of infected people likely travelled from the city before the quarantine was established.
During Chinese New Year, domestic travel within the country mushrooms as people return home for the festive period. This mass movement of people makes it much harder to restrict the virus’ spread.
To ease public and market fears, Beijing has offered real-time reporting of the number of cases. Markets have been calmed somewhat by the government’s transparency and fast, decisive response.