There was a phrase that frequented newspapers in the 1950’s and 60’s: “When Wall Street sneezes, the rest of the world catches a cold”. Since that phrase was coined, we have seen China’s economy grow into the second largest in the world, making China the Wall Street in today’s context, as we watch the global impact of the coronavirus filter down with knock on effects across global stock and currency markets.
The chronicles of the coronavirus have already had several twists and turns regarding the data released, from different testing methods to the geographical spread as well as actual numbers of those effected. We have watched the markets react with many losses and some interesting gains, however there are still far too many questions that remain unanswered for us to determine the true impact on the wider global economy and FX rates.
Looking back in history
The only real precedent that can be used to guide our response to the coronavirus is the SARS outbreak in 2003. Analyst will be examining how this impacted stock and currency markets; however, we must be mindful that technologies and markets have evolved in the intervening period. When SARS became a global issue in March 2003, there was an initial shock to commodity and stock markets. However, the market had largely recovered by late June the same year, after the World Health Organisation declared that SARS was under control. Based on figures from The World Health Organization on 25/02/20, the number of cases of coronavirus eclipse SARS, 80,348 cases compared to 8096.
Impact on growth so far
The Shanghai Composite Index (SSE) started to trend downward on January 20, with the first major stock market fall on January 23, after several cities were placed under quarantine. The main drop came on February 3 following the WHO's classification of the coronavirus as a global emergency. This was China’s biggest market fall in four years, with shares down 8%, and travel and tourism sectors were the hardest to be hit.
Source: Morningstar Direct. 10 Feb 2020
What has become clear is that global growth is under threat, as the manufacturing capital of the world goes into semi lock down. The full impact on the supply chain so far is unknown, but what is clear is that it will be detrimental.
Concerns surrounding European growth were already high on the agenda for discussion, with the prospects for German growth diminishing. For example, Germany recently posted a flat level of zero GDP growth for Q4 2019; and it’s possible that disruption to supply chain could result in a negative growth reading for Q1 of this year. This will put Germany in recessionary conditions, albeit not a technical recession in name (two consecutive quarters of negative growth).
Singapore recently lowered its growth forecast for the year, raising the spectre of a possible recession. Growth is now estimated at between -0.5 per cent and 1.5 per cent; a stark revision from November, where expansion of 0.5 per cent to 2.5 per cent was predicted.
Looking at consumer goods, Apple analysts are downgrading their iPhone shipments forecast by 10%, reflecting coronavirus containment efforts, while luxury coat manufacturer Canada Goose Holdings Inc. Says the coronavirus is hurting performance.
Over the final weekend of February, Italian officials imposed strict quarantine restrictions in two northern "hotspot" regions close to Milan and Venice whilst South Korea has raised its coronavirus alert to the "highest level". In the meantime, The World Health Organisation stated that the window of opportunity to contain the virus was "narrowing". This has resulted in stock markets tumbling yesterday following the increased concerns surrounding the virus. FTSE 100 hits a four-month low today as stock market sell-off continues.
Currency effects so far
As a result of the potential impact the coronavirus outbreak could have on Germany, the single currency has been on the back foot, hitting its lowest level against the US dollar since April 2017. Since January, the Chinese Yuan has declined close to 2.5%; a move lower that has subsequently been contained by the People's Bank of China. In the meantime, commodity currencies such as the Australian dollar have seen a drop close to 5%, as demand for natural resources decreases. To provide some context around this, the price of crude oil has declined by circa 20% since January.
What to do with your FX exposure?
Nobody really knows what will happen next with the coronavirus outbreak and how it will affect the global economy. Analyst will be looking at models of what happened during the SARS outbreak, but a single comparable event is not a good sample size to draw conclusive thinking from, regardless of how many times you scratch the statistical modelling.
FX markets have experienced some increased volatility, but in large the effects of the coronavirus in currency markets have been contained; for now. If you have FX exposures, you need to decide how much risk management you require, for how long and when you need to make these decisions by. An FX specialist won’t be able to provide you with a crystal ball to see what happens next, but they can help you identify instruments and strategies that can assist you while deciphering your FX exposure concerns/risk.