During this time of the year, it’s usually the earnings season that drives investment decisions. However,  it’s the rising concerns over an outbreak of the deadly coronavirus that is currently dictating market moves. The number of confirmed cases has spiked to almost 8,000 and the death toll rose to 170 as of January 30. While we’re still in the early stages of the outbreak, it remains unclear whether the economic impact is going to be smaller or larger than the 2003 SARS outbreak.

Despite the Wuhan virus so far showing a lower mortality rate (below 3%) compared to SARS (10%), the number of confirmed cases has already overtaken SARS inside mainland China. Even though the country has acted much faster in limiting the transmission compared to previous episodes, evidence shows that the disease can be transmitted before a person shows any signs of illness, and that is making it a more frightening type of virus.

Several international retail and fast-food chains have closed in many cities across China, including H&M, McDonald’s and Starbucks. Google also announced yesterday that it is temporarily closing its China offices.

China today is a far larger economy than it was in 2003. Back then, it represented 5% of global output, now it’s almost a fifth of GDP with much more integration within the global economy. Chinese nationals have also become the main driver of global tourism and every luxury retailer is targeting them. More than 30% of European luxury brand revenues come from Chinese consumers and that is why they have been hit hard over the past several days.

While markets in China remain closed on Thursday for the Lunar holiday, the rest of Asian markets have seen their indices decline sharply. Taiwan’s Taiex plunged more than 5.75% as many shares reached their 10% limit down decline, including shares of major Apple supplier, Foxonn. Hong Kong’s Hang Seng fell 2.2% taking its two-day losses to more than 5%.

Expect to see further declines and more volatility in risk assets in the coming days. Investors who were waiting for the dips to buy may need to wait a little longer, until we see signs of a peak in the rate of virus infection.  Meanwhile, gold and Treasuries are likely to remain in demand.

Traders split ahead of BoE rate decision

Today’s BoE interest rate decision is likely to be more interesting than yesterday’s Fed which kept rates unchanged and stressed the US economy is in ‘a good place’.

Monetary Policy Committee members have a tough assignment today on deciding whether the UK economy has recovered strongly enough post-election to justify keeping rates unchanged. While most economists predict rates to remain at 0.75%, swap traders are pricing more than a 40% chance of 25 basis point rate cut.

Given this market confusion, expect to see strong moves in the Pound in the event of either decision. If the BoE holds steady and only two members vote for a rate cut like in previous meetings, Sterling will likely see a strong recovery towards the 1.31-1.32 range. Meanwhile, a rate cut could see the currency drop below strong support at 1.29.

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