The yen's recovery is an important marker for stability in financial markets. Photo: AFP

Just after the financial commentariat reached the conclusion that the Japanese yen had lost its safe-haven role, the Japanese currency spiked in the middle of a global market selloff. Gold, which seemed like the last and only refuge against pandemic-driven market fears, fell sharply during New York’s Monday session. Japan’s and China’s equity markets had registered only minor losses overnight, with Japan’s broad Topix index closing unchanged and the Shanghai Composite off by less than 0.3%. 

European markets were off by about 4%, by contrast, and the US market fell by nearly 3%.

The epicenter of the coronavirus epidemic is in Asia, after all, so the resilience of Asian markets is noteworthy. The American ASHR ETF, which tracks the performance of the CSI 300 Index, opened with a loss of 3.4%, but recouped nearly half of that by the middle of the US session.

Evidently investors have a high degree of confidence that Asian countries are better equipped to manage epidemics than the West. The outlier is South Korea, whose KOSPI index fell by nearly 4% overnight. The American EWY ETF, which tracks the South Korean MSCI Index in US dollars, opened down 6% from Friday’s close, and was little changed during the day.

China’s surveillance state, which tracks the whole population through facial recognition and cell-phone monitoring, offends Western values, but it has advantages in an epidemic. The Chinese government can track individuals who might be infected with the novel coronavirus but who evade quarantine by monitoring purchases of medicines, among other things. Authoritarian measures of this sort are harder to bring to bear in Western democracies. 

The World Health Organization declared Feb. 24 that the epidemic had peaked in China, and that its main concern was the spread of the virus elsewhere.

The yen’s recovery is an important marker for stability in financial markets. If gold becomes the only functioning hedge, it means that investors have lost confidence in all governments, and revert to the “barbaric relic” (JM Keynes) as the ultimate refuge. The return of the yen to safe-haven status implies that investors expect governments to get control of the epidemic, and will reward asset classes that reflect such control.

For investors who worry that today’s nose-dive in equity valuations portends a major financial crisis or a global market correction, the surge in the yen and the corrresponding fall in the gold price should be a source of reassurance.

Every market strategist is moonlighting as an epidemiologist this month, and the propagation of the novel coronavirus hasn’t followed the pattern of previous epidemics. That makes the outlook inherently uncertain. But it is highly significant that markets are willing to reward effective responses to the epidemic rather than respond in blind panic.