Hope of Containment Dashed, Reality Led to Global Market Rout

We ended last week’s article by saying “we think European and US markets appear to disregard the impacts of the coronavirus outbreak. Quite soon we expect risk assets in the advanced economies to correct sharply”. Little did we know that a global stock market rout would take place the following week. Now most stock markets are in correction territory, and it was the worst week for the global stock markets since the global financial crisis erupted in 2008.

The VIX index rose from around 24% on Monday, Feb 24 to end the week at around 40%. The volatility index, Wall Street’s “fear gauge”, reflects growing concerns over the impacts of the coronavirus outbreak on the global economy. It was the second-biggest weekly rise on record, trailing only the October 2008 crash.

Demand for safe-haven assets pushed the yield on the 10-year US treasury to record lows this week at 1.11%. Market turmoil prompted the Federal Reserve to issue a statement on Friday that it would act appropriately to support the economy in response to evolving risks stemming from the coronavirus outbreak.

Only a week ago, financial markets in the West remained largely complacent over the threat of the coronavirus outbreak to global economic activity. Now several multinational companies have banned travel altogether, implementing business continuity plans to quarantine those who have just returned from foreign trips. Switzerland decided to ban events attended by more than 1,000 people, which led to the cancellation of the Geneva Motor Show and Basel World, the much-anticipated annual trade show for the watch industry.

On our recent business trip over two weeks ago, we travelled to Singapore, the UK and the US. We witnessed first-hand how little our counterparts in the West knew of the gravity of the situation. On our first stop in Singapore, we got through immigration within two minutes, which was unprecedented. Then at every meeting we went to, our temperatures were checked and our names and contacts recorded before entering the buildings. Moreover, we were prohibited from the customary handshakes at meetings. In London and New York, however, none of those practices in Singapore were implemented.

During the two-week period, we witnessed financial markets continuing to gain ground despite what was happening in Asia. Even more incredible, the 10-year Greek government bond yield dipped below 1%, which reflected the level of complacency displayed by global market participants. Most believed that the virus outbreak would be rapidly contained and soon things would return to normal. That belief was shattered when the number of infections rose sharply in South Korea and Italy. Now the global markets are in uncharted territory, as no one can be certain how long this outbreak will last, or how quickly the global economy will rebound.

Back home in Thailand, we have seen almost all business meetings cancelled or postponed indefinitely. The SET index plummeted on growing worries over the economy. Also, news of employees in the hospitality businesses being asked to take leave without pay has created panic over which sector will be next. Banks have started to restructure loans in order to support their customers through this period of negative shocks. Soon we expect to see more concrete support from both fiscal and monetary authorities in Thailand.

In the case of Thailand, the central bank is running out of policy space, with the repo rate at a record low of 1%. We reckon that the minimum lower bound for the policy rate is 0.50%, which implies only 50 basis points further from where we are. Therefore the heavy lifting must come from fiscal policy. Fortunately, public debt to GDP is only about 42%, and there is plenty of fiscal space to help support the economy. In the case of Hong Kong, the government has decided to give a cash handout of HK$10,000 to its citizens. We expect the Thai government to follow suit in a similar fashion soon.

Earlier this week, President Trump encouraged Americans to buy the dip in the stock markets. While we believe this outbreak will be temporary, the impact on the global economy will likely be much more severe and longer-lasting than most had anticipated. With fleets of airplanes grounded, schools closed and meetings cancelled, we strongly advise against catching a falling knife at this point.

In our view, we reckon that the coronavirus outbreak should be contained with the arrival of summer in Europe and the US, around June and July. From then on, we should expect to see global travel return to normal gradually. The big question is centred on how resilient our business sector is to a potential six-month disruption, and what policy responses will be introduced by the governments around the world. One thing is certain: the words of John Donne, “No man is an island”, could not be timelier, and decoupling is being proved a fiction once again.