Businesses such as supermarkets are struggling in China as the Covid-19 outbreak brings vast parts of the country to a standstill. Photo: STR / AFP

Trade of the Day: Stocks, futures hammered across the board; US Treasuries and Japanese yen rally.

Quote of the Day: “We have cut our 2020 global growth forecast to 2.8%. This would be the lowest reading since 2009. Growth momentum was soft even before the coronavirus shock. China’s aggressive quarantine measures point to a very weak 1Q. We expect lagged spillover effects due to supply-chain and tourism disruptions, and the spread of the virus outside China,” BofA Securities analysts said in a note.

Stock of the day: Japan government bonds (JGBs) fell by 5-7 basis points. The JGB curve has been in negative territory for maturities up to 10 years which now yield -0.16%. The 20-year JGBs yield 0.14% and the 30-year bonds a mere 0.16%.            

Number of the Day: 30% – The chance that the United States will fall into a recession according to the latest reading from a Bloomberg Economics model that incorporates data spanning economic conditions, financial markets and gauges of underlying stress.

Tip of the Day: “From the perspective of evaluating the global business cycle, we view Covid-19 as a transitory, exogenous shock as opposed to an economic slowdown which is caused by endogenous pulls and pressures of an economy that is overheating and fundamentally challenged. We remain of the view that the recovery is being delayed but not derailed,” Morgan Stanley economists said in a note on Friday.

Global financial markets had their worst week since the 2008 financial crisis as fearful investors dumped risky assets and fled to the safety of US Treasuries and the Japanese yen.

MSCI Asia Pacific ex-Japan tumbled 2.3%, Japan’s Nikkei 225 index dropped 3.7%, Australia’s S&P ASX 200 slipped 3.25% and Hang Seng closed 2.4% lower lead by losses in technology, energy and consumer cyclical sectors. Selling was particularly severe in mainland markets with the CSI300 index collapsing 3.55%.

The US 10-year Treasury yield plunged 7 basis points to 1.19% and the Japanese yen jumped 0.9% to 108.69 to a dollar.

“Two things probably best explain the rapid swing this week to the poor end of the risk smile. One, that the concern about the Covid-19 epidemic curve has shifted from focusing on China to its spread outside, and along with it, the notion that this is no longer a tourism or trade shock, or even just a China-related supply shock, but a potentially large domestic demand shock in multiple economic centers,” a note from Deutsche Bank said.

“Two, that policy response in many places, while scrambling to contain the spread (largely through travel restrictions), remains behind the market curve in dealing with the potential economic fallout. Asia macro has had a head start on a lot of these worries,” it said referring to South Korea’s decision to hold interest rates, Bank Indonesia’s heavy intervention in markets and China’s decision to front-load policy/liquidity easing.

Selling is expected to continue as the European day progresses with the Stoxx Europe 600 plummeting 3.9% and Wall Street is expected to see more selling with S&P futures down 1.8%. The VIX Index, an indicator of fluctuations in the US stock market, and also called Wall Street’s ‘fear gauge’ surged 10.4% to 43.23. It is generally accepted that when the VIX Index rises above 30 it indicates serious unease, and a reading above 40 heralds a crisis. Its long-term average is about 20.

“The volatility index or the fear gauge, as it is often referred to, was bumping along at its lowest levels for the past couple of years and even as recently as last month. This week it has reached its highest level in the past two years, highlighting that it is often when the market is least expecting something of global significance to happen, everyone will suddenly wake up and start to sell,” said Andy Scott, associate director at Chatham Financial.

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Umesh Desai

Umesh Desai is Asia Times Finance Editor. Prior to his current role he was at Reuters for 19 years before which he was a credit ratings and equity research analyst. A chartered accountant by training, he is based in Hong Kong.