Bassanese Bites: Hold your breath – February 24 2020

Last week global markets got their first taste of the negative economic impact of the coronavirus – and it was not easily digested.  Although China continues to claim that the rate of new infections has peaked, Apple’s warning of disruptions to both Asian sales and production – and, perhaps more importantly, the surprisingly sharp drop in US service and manufacturing indices in February nonetheless took their toll.   Goldman Sachs also saw fit to warn that markets were not fully factoring in the likely negative hit to Q1 earnings.   All up, it was enough for the S&P 500 to gave back 1.3% last week, although it’s still up 3.2% so far in February.

Gold and the $US are the safe havens of choice in this environment, with the latter also helped by relative weakness in non-US economic growth.  Indeed, Japan’s economy contracted in Q4 following the October sales tax hike and there’s now some risk of a technical recession if virus concerns cause negative Q1 growth also.

With global equity PE valuations at historic highs (albeit arguably justified by low bond yields) and markets having shrugged off virus concerns so far, it’s probably reasonable for a pullback of sorts to kick in over the next few weeks (or even months) as the clear negative economic shocks – even if considered short-term – are absorbed. Also still troubling are reports of virus outbreaks outside of China – with South Korea, Italy and even Iran new areas  of concern.  With with regard to the virus itself, therefore, it’s still seems too early to conclude the worst is over.

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