5 February 2020

It’s the economy, stupid.

Markets were rocked by the potential disruption to global growth that the coronavirus could deliver, though the recovery, particularly in the US, has been remarkably swift.

It was Asian markets that were understandably hardest hit by fears that Chinese growth will slow as a consequence of the measures introduced to contain the spread of the disease. China is, after all, the world’s second largest economy after that of the US and has been growing at an impressive rate for several decades.

Unsurprisingly, oil and other commodities have also taken a hit as traders move into a risk-off mode. Moves by the People’s Bank of China to inject liquidity into their banking system is indicative of just how concerned the authorities are there. This swift action has helped reverse sentiment to an extent, while the increasingly dovish Fed is also pumping money into the system. Given the references to the strength of the US economy in President Trump’s State of the Union speech, the American central bank clearly has no wish to rock the boat.

Sterling has seen some of its recent shine rubbed off as tough words on the likely trade talks with the European Union from both sides brings back the prospect of a hard exit at the end of this year. We may have left the EU, but the hard work has yet to be done. Paradoxically, a weaker pound does our own benchmark index no harm, thanks to the international composition of the Footsie. With the first of this government’s budgets due shortly, domestic investors will have plenty to get their teeth into.

On the international scene, the effect of the coronavirus may yet turn out to be creating more of an opportunity than a risk, but investor caution is understandable while the true consequences remain unknown. While the death rate is low at around 2% - and mainly within higher age groups and those with pre-existing medical conditions – the speed at which it has spread will undoubtedly ensure governments and companies take action to protect themselves. Nike, for example, has closed half its stores in China and is operating at reduced opening hours for the rest.

In the end it will be the perceived effect this outbreak has on economic growth that will determine how investors react. Confidence had been growing that the agreement between China and the US over trade would allow upward momentum to re-establish itself. It seems that just as one potential disrupter of sentiment resolves itself – like trade wars and the Trump impeachment – another emerges to keep investors on their toes. These are markets in which investors need to keep an eye on the economic numbers and stay nimble.

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