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How is the coronavirus impacting financial markets?

The outbreak of a new coronavirus is prompting fears that a health pandemic is on the horizon – and this is infecting the stock markets too.

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What is a coronavirus?

The World Health Organisation (WHO) was made aware earlier this month that people from Wuhan City in the Hubei Province of China had contracted a new type of virus that has never been seen in humans before. It has similar symptoms to pneumonia and predominantly causes respiratory problems. This new virus is part of the family of coronaviruses that include everyday illnesses like the common cold and more serious viruses like SARS and MERS. It has temporarily been named ‘2019-nCoV’.

Several coronaviruses are known to exist in animals but not humans, and this latest outbreak is thought to be caused by 2019-nCoV being transmitted from an animal to a human at a wet market in Wuhan. This has happened before, with SARS having been transmitted by civet cats while MERS came from camels.

There is not currently a vaccine or treatment available, although governments around the world are racing to find one. One major problem of this new virus is that the symptoms do not appear to become apparent straight away – meaning people can carry the virus without knowing for as long as two weeks before symptoms start to show. This makes it harder to identify people that have been infected, making it easier for it to spread.

Where has the coronavirus spread?

Once a human has been infected, they can then go on to infect other humans they come into contact with – which has allowed the virus to spread quickly. China has effectively locked down and quarantined the city of Wuhan after discovering the virus originated there, with all public transport brought to a halt. Around 11 million people live in the city, making it roughly the same size as London. Authorities have also extended the Chinese New Year holiday in the hope this will minimise travel and help contain the virus from spreading further.

Cases of the new virus have been recorded in almost every Chinese province. There has been nearly 3000 confirmed cases and thousands more of suspected ones, according to Chinese health officials. So far, the virus has been fatal for at least 81 people in the country, mostly older people and those that have pre-existing respiratory problems.

Most other countries have imposed strict travel rules for people trying to enter the country from Wuhan or other severely affected regions – but this has not stopped the virus spreading across the world. Neighbouring Asian nations including Japan, Taiwan, Thailand, Vietnam, Singapore and South Korea have all reported confirmed cases, as have those further afield like Australia, the US, Canada and France. The UK is yet to find anyone with the virus but has been examining many suspected cases, with some health officials warning that the virus is already likely to be in the UK and possibly spreading without anyone’s knowledge.

How is the coronavirus impacting stock markets?

The outbreak has certainly impacted financial markets. The question at the moment is how pronounced it will be and whether it is temporary or something that will weigh on markets for a prolonged period. WHO has not yet declared the new virus as a global emergency, which has provided some assurance, but nobody knows how the outbreak will develop or the chances of it petering out.

Suspected cases of a new virus were first known on 31 December 2019, but the new virus was not confirmed by WHO until 7 January 2020. Since the start of the year, the Shanghai Stock Exchange has lost over 3.5% while the Hang Seng Index in Hong Kong has shed over 2%. The Chinese yuan has also lost value. Below is a chart of the China A50, which is comprised of major stocks from the Shanghai and Shenzhen stock exchanges, that demonstrates how markets have weakened as the virus – and fears this could be the beginning of a much wider health scare – continues to gain momentum:

China A50 chart Source: IG charts
China A50 chart Source: IG charts

A similar trend has taken hold of markets outside of China too, albeit to a lesser extent. Indices in the US, UK, Germany, Japan and Australia have all come under pressure over the past week. Fears that the virus will weaken growth and demand are why stock markets from around the world are taking a hit.

Market intelligence firm S&P Global released a report on 23 January that said it was ‘too early to quantify the potential impact of the coronavirus on China’, but said companies exposed to household spending, particularly activities outside the home such as travel and leisure, are at the greatest risk. It said it is even harder to judge the impact on other countries at this stage.

How is the coronavirus impacting commodity prices?

The price of key commodities like oil and copper have also taken a hit from the outbreak because of fears that demand will fall. For example, the price of oil has fallen because China and others have imposed strict travel restrictions that will reduce the amount of oil needed to run cars and planes.

Brent chart Source: IG charts
Brent chart Source: IG charts

Meanwhile, fears of a larger outbreak has prompted concerns that demand for key building materials like copper will also fall this year.

Copper chart Source: IG charts
Copper chart Source: IG charts

China is the biggest market for building materials and any slowdown in growth there will have a major impact on commodity prices and the share prices of those that produce them. For example, the FTSE 350 Mining Index has shed over 8% in the past five days:

Mining chart Source: IG charts
Mining chart Source: IG charts

How is the coronavirus impacting safe havens?

Not all commodities have suffered. Safe havens have benefited as more people shift their money to the likes of gold to avoid the volatility and uncertainty impacting other areas of the market.

Gold chart Source: IG charts
Gold chart Source: IG charts

How is the coronavirus impacting safe havens?

Not all commodities have suffered. Safe havens have benefited as more people shift their money to the likes of gold to avoid the volatility and uncertainty impacting other areas of the market.

The Japanese yen, also treated as a haven among currencies, has also strengthened against other major currencies including the dollar, pound and the euro. However, if the virus becomes a bigger problem for Japan then this could unwind in the future.

Read more about safe-haven assets and how do you trade them

Is there any upside to the coronavirus for investors and traders?

Although the discovery of this new virus is not welcome by anyone, certain sectors are benefiting from it. Share prices of pharmaceuticals, biotech firms and companies that make protective gear like face masks and gloves have generally risen since the discovery of the new virus on expectations that demand for their products – or any new treatment they may come up with – will increase as a result. The KraneShares MSCI All China Health Care Index ETF, which tracks some of the largest healthcare companies in the country, has gained nearly 6% since the new virus was identified earlier this month.

This has not been limited to China. Take Alpha Pro Tech as an example. The US stock produces masks and other protective gear designed to stop infections spreading and has seen its share price soar over 70% over the past ten days:

Alpha Pro Tech chart Source: IG charts
Alpha Pro Tech chart Source: IG charts

What lessons can be learnt from SARS?

This is not the first time a newly discovered virus has severely impacted financial markets. One of the most recent major outbreaks was SARS, which started to take hold in late February to early April in 2003. This too originated in China and ended up killing almost 800 people in 17 different countries. It is currently believed that SARS was more lethal than 2019-nCoV in its current state, although some have warned it is still developing and mutating.

One analysis conducted by Jong-Wha Lee and Warwick McKibbin suggests the SARS outbreak cost the global economy almost $40 billion in 2003 alone. However, the impact it had on equities was short-lived. The SARS outbreak lasted for around six months in total, but the MSCI World Index continued to gain ground throughout. In fact, it sat over 20% higher by the end of the outbreak compared to the start.

Coronavirus: a summary

  • Reports of several people in China becoming ill first emerged on the last day of 2019
  • The newly discovered coronavirus was formally identified by WHO on 7 January 2020
  • The virus is predominantly affecting people in China but has spread to several other countries
  • Fears that the virus could spread further and develop into a worldwide pandemic has weighed on stock markets around the world and commodity prices have also fallen on fears of weaker demand and economic growth
  • But safe havens like gold and certain stocks in the healthcare industry, like pharmaceuticals, have benefited as a result
  • This trend is expected to continue while the virus continues to spread and the impact outside of China could increase if any major outbreaks are reported elsewhere, such as in the US
  • However, expect markets to rebound if there are signs that the virus is being contained or on news that a treatment or vaccine has been found, as has been the case in previous outbreaks of viruses like SARS

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