Thursday , April 2 2020
Breaking News
Home / Business / Fear factor: Global markets in turmoil as pandemic looms

Fear factor: Global markets in turmoil as pandemic looms

Since Friday, the US sharemarket has fallen nearly five per cent. It fell about 3.5 per cent overnight while European markets were all down about 4 per cent.

Loading

The technology-laden “FAANG+” index – the core of which is provided by Facebook, Amazon, Apple, Netflix and Google – has fallen about eight per cent.

That slump is probably a combination of the very high price-earnings ratios of tech companies being unwound and the real effects of the virus on those companies, like Apple, Tesla and Alibaba, that have supply chains anchored within China or are exposed to Chinese consumers, or both.

The “fear index” – the VIX index, which reflects the expected levels of volatility in the US sharemarket – has spiked nearly 75 per cent since the middle of last week to its highest levels since the 20 per cent plunge in the market that occurred late in 2018.

The turmoil isn’t confined to equity markets.

Yields on 10-year US Treasury bonds have tumbled towards historic lows. At 1.37 per cent, the yield on those bonds is lower than the 1.53 per cent available from three-month Treasury notes – the US yield curve has inverted quite steeply.

An inverted yield curve – one where short term rates are higher than those on longer term bonds – has pre-dated every US recession of the past half century.

Towns in northern Italy are in lockdown as the coronavirus gains a beachhead in Europe.

Towns in northern Italy are in lockdown as the coronavirus gains a beachhead in Europe.Credit:EPA

At the least, it presages an economic slowdown and as a signal is consistent with US purchasing managers’ index data last week that showed activity in factories and the service sector shrinking to its lowest level in six and a half years.

Given the nature of global supply chains and the global economy, with the leads and lags of orders and inventories, it was always going to take some time before the impact of the virus on economies outside of China began to show up clearly.

Loading

Within the next month or so the damage will become more evident and calculable and it will be easier to determine whether the virus has simply deferred activity to later in the year with, as occurred with the SARS epidemic, an eventual blitz of catch-up activity, or has resulted in a more structural reduction in global growth.

The longer the virus persists and the further it spreads the more likely it will be the latter rather than the former.

The US bond market activity is telling because the trend in US yields had already diverged from what was, before fears of the virus spreading took hold last week, an ebullient stock market. Bond investors tend to be more conscious of risk and more risk-averse than investors in equities.

There had been something of a flight to safety occurring – a year ago the yield on 10-year bonds was 2.76 per cent and at the start of the year it was still 1.92 per cent – even as the sharemarket was posting records that seemed out of kilter with the relatively modest growth occurring in the US economy. The directions of the two markets are now in an apprehensive sync.

The bond market inversion probably owes something to the flight to safety, with investors looking for somewhere safe to park their cash until the ultimate impact of the epidemic becomes clearer.

The US dollar, which has strengthened about two per cent against America’s major trading partners this month, probably also, reflects that same shift in appetites for risk.

There may also be another influence behind the falls in yields. The market is now effectively pricing in two US Federal Reserve rate cuts this year, assigning a near 75 per cent probability to the prospect that the Fed will be forced to respond to a slowing of the US economy.

Loading

If that were to occur, our Reserve Bank would, incidentally, almost inevitably be forced to follow suit to avoid the risk of the Australian dollar strengthening and adding to the economic fallout from the woes within our biggest trading partner. The RBA might in any event decide it is necessary to cut rates further to soften the impact of the regional economic dislocation.

Most Viewed in Business

Loading

About admin

Check Also

Westpac’s new chief warns post-virus economy will be different

Loading Mr King, a 25-year veteran of Westpac, was on Thursday appointed to be its …