Late February, early signs of the virus spreading globally triggered a severe selloff in equity markets and yields on government debt collapsed. Meanwhile, high-frequency Chinese indicators such as daily coal consumption and road traffic were showing a gradual rebound in activity. Europe is starting to feel the pain as Chinese tourism has collapsed while the spreading of the virus has put parts of Italy under lock down. Although the virus has gone global, the rate of contagion appears to have tapered off (Source: World Meters). But it remains unclear how severe the infection rate could evolve in Europe and North America, which matters most to investors. Although on average 400,000 people die of the flu every year (Source: NCBI), Coronavirus (COVID-19) has raised several unknowns and fear.
China has managed to contain the spreading of COVID-19 quite rapidly and the drastic measures to contain the spreading have been largely successful. For instance, the Guangdong region, with a population of about 110 million, has seen less than 1500 confirmed cases and 7 deaths as of March 4 (Source: CHP), which means a very low 0.001% infection rate.
Less than a week after Fed Vice Chair Clarida said policy is at a “good place” (Source: Bloomberg), the “Fed-put” was triggered on the morning of March 3 with a 50 basis point (bps) emergency rate cut. While it won’t cure the virus, we believe lower interest rates are making equities even more attractive. Unwinding these rate cuts is likely to prove more difficult than delivering them.