There’s something different about the threat COVID-19 poses to the global economy. And that’s what has investors worried. “Because of its genesis in China, coronavirus is both a demand and a supply shock to the global economy,” said Brian Nick, chief investment strategist at Nuveen, in a Tuesday note. “Outside of China, however, evidence based on February’s survey data suggests that demand remains solid, and supply issues are the key risk.”
Stocks weathered temporary pullbacks earlier this year, with bulls shrugging off warnings about the potential impact of quarantine efforts and shutdowns on Chinese consumer demand and global supply chains. Stock-market bears have argued that the nature of the potential economic shocks from the viral outbreak, coming at a time when central bank stimulus efforts were seen as already stretched, could threaten the long-running bull market.
While demand has so far held up outside of China, the disruption to global supply chains running through China, Korea and, potentially, Japan is likely to take a toll on production, wrote Nuveen’s Nick. If Asian production stoppages worsen or continue well into the second quarter, a global supply crunch could hit the already weakening manufacturing sector, he said, with implications for jobs and the wider global economy.
Moreover, it comes in an environment where valuations for U.S. stocks and credit markets were “’priced to perfection’ or something close to it following the three Fed interest rate cuts last year and the resolution of various trade deals,” he said. Indeed, coming into this week, markets had largely reacted in “a rather casual, and inconsistent, way,” said UniCredit’s Nielsen.
That was due largely to central bank asset purchases and ample liquidity, as well as the unsubstantiated belief the outbreak would be a brief passing issue on the order of the SARS outbreak in the 2000s, he said, along with “apparent confusion about the nature of demand versus supply shocks and the (limited) effectiveness of policy stimulus in these circumstances.”
Stock market slammed by fears coronavirus will deliver a ‘supply shock’ that central bankers can’t fix, MarketWatch, Feb 27
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