Corona infects the markets

The sharp rise in new corona infections outside China caused an abrupt correction on the stock markets after an optimistic start to February. High-quality government bonds and gold were in demand, however.

In February, the global spread of the corona virus triggered a correction on the stock markets, after the German stock index (DAX) and the US S&P 500 Index, among others, had previously reached new highs. The DAX closed with a loss of -8.41%, the broad European index Stoxx Europe 600 lost -8.54%, and in the USA the S&P 500 Index lost -7.73%. In Asia, on the other hand, the Hang-Seng Index (Hong Kong) fell by only -0.32%. The global stock index MSCI World fell by -7.91% - all index data on a euro basis.

In the course of the month, there were more and more new corona infections worldwide, the majority of them outside China, the country of origin of the virus. In China itself, new infections stagnated from mid-February onwards and the number of recoveries increased significantly. Within Europe, Northern Italy was particularly affected by the corona virus, where the government quarantined ten cities. In Germany, Federal Health Minister Jens Spahn asked the responsible authorities to activate their pandemic plans as a precautionary measure - a warning that was also issued by the US authorities. By the end of February, some 82,000 corona infections and 2,800 deaths had been reported worldwide.

The uncertainty surrounding the novel virus, for which there is currently no vaccine, triggered an abrupt market correction. Investors expected problems for international transport routes, interruptions in production due to the just-in-time logistics of the industry and losses for sectors that do a significant part of their business with China, such as the export-oriented consumer and luxury goods industry or the automotive industry. Various major groups from the IT, automotive, pharmaceutical and industrial sectors, among others, reported that they had missed their sales targets for the first quarter.

On the other hand, high-quality government bonds experienced a rally. The yield on ten-year German government bonds fell from -0.45% to -0.60%, and the yield on their US counterparts fell by 37 basis points to 1.19%, a new all-time low. Gold briefly reached a level of USD 1,700/troz, but then closed the month unchanged from the previous month at USD 1,587.

The ifo Business Climate Index and the Purchasing Managers' Index, two important leading economic indicators for Germany, improved. The latter also rose for the euro zone. By contrast, data on new orders, industrial production and overall economic growth in Germany were disappointing, stagnating at 0.0% in Q4 2019.

In China, expectations for economic growth in the first quarter fell sharply due to the burden of the corona eruption. In order to alleviate financial bottlenecks for companies, the Chinese central bank reacted with expansionary monetary policy measures, including a reduction of its one-year key interest rate by 10 basis points to 4.05%. In Hong Kong, the government distributed "helicopter money" to each resident in the equivalent of USD 1,300.

In the US, Jeremy Powell, head of the Federal Reserve (Fed), described the US economy as "resilient" in light of robust data, including retail sales, real estate market data, industrial purchasing managers' indices, as well as services and new orders. He also described the outbreak of the corona virus as an economic risk and signalled that the Fed is ready to act if necessary. Market participants then priced in a total of three interest rate cuts for 2020, the first of which is due in March.

 

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