World Stock Markets Begin Betting on a Coronavirus Slowdown

Big declines in the United States, Europe, and Asia and an inverted yield curve indicate market players are starting to fear the worst.

By Keith Johnson, a senior staff writer at Foreign Policy.
A pedestrian wearing a face mask walks past a board displaying the Nikkei 225 Index on the Tokyo Stock Exchange on Feb. 25. Japan's stock market joined the global rout as fears of a prolonged economic hit from the coronavirus outbreak have chilled investor sentiment.
A pedestrian wearing a face mask walks past a board displaying the Nikkei 225 Index on the Tokyo Stock Exchange on Feb. 25. Japan's stock market joined the global rout as fears of a prolonged economic hit from the coronavirus outbreak have chilled investor sentiment. Philip Fong/AFP/Getty Images

With two days of big declines so far this week, global stock markets appear to be pricing in a longer-term economic downturn from the coronavirus outbreak, which has now spread rapidly from the world’s second-largest economy, China, to the Middle East and Europe.

One sign is that as investors start to see real prospects of a global economic slowdown, they are looking for safe havens for their money, sending the yields on U.S. government bonds down to near-record lows (and pushing up yields in recession-prone places like Italy and Greece). More worrisome is that U.S. bond yields are showing clear red flags, even more than they have flashed in recent months. Yields remain inverted—meaning returns are higher for very short-term debt compared with 10-year bonds. This is the reverse of the normal situation and a pretty reliable sign that there is a recession on the way.

The International Monetary Fund has so far only tweaked its outlook for China and the rest of the world this year due to the outbreak of the coronavirus disease now known as COVID-19, with expectations that Chinese growth will suffer early and largely be made up by the end of the year. But some other forecasters fear that the knock-on effects of near-paralysis in China—coupled with disrupted supply chains, border closures, a slowdown in tourism and travel, and jitters about the resilience of emerging markets—could hammer the global economy just as hard-hit manufacturing countries and beleaguered consumers were showing signs of confidence.

Oxford Economics, for instance, now expects the virus to knock first-quarter Chinese growth down to just 3.8 percent and to only 5.4 percent for the whole year—a big drop for a country that needs growth of about 6 percent to meet its economic and political targets. Globally, the impacts of the virus could drag global growth down to about 2.3 percent this year, the lowest level since the depths of the financial crisis, Oxford said.

Initially, many businesses, investors, and bankers expected the coronavirus outbreak to be similar to the 2003 eruption of SARS, if perhaps a bit more painful. But now that the virus has spread to the Middle East and Europe—closing big chunks of Italy’s northern economic heartland and even spreading into Spain—the worry is that what began as a contained outbreak could turn into a pandemic, as the World Health Organization warned Monday. 

“Stock markets are finally starting to recognize the uncertainty” after staying stubbornly resilient, said Jorge Sicilia, the chief economist of BBVA, the big Spanish bank.

The virus’s impact on China has been increasingly evident since last month, with a quarantine in Hubei province, where the outbreak began, matched by similar, often voluntary quarantines in many other cities. Together with the extended Lunar New Year holiday, those restrictions have prevented millions of workers from getting back to their jobs, which in turn can mean lost paychecks for Chinese consumers, closed businesses, and disrupted supply chains with ripple effects all over the world.

While Apple, a tech firm heavily exposed to Chinese suppliers, rattled markets last week with a forecast sales decline, other less obvious companies are starting to feel the pinch. Mastercard now says it will earn less than expected due to the decline in travel, the Australian vintner Treasury Wines downgraded its forecasts due to lower Chinese consumption, and United Airlines gave up trying to offer financial guidance this year at all until the virus runs its course.

Asian countries like South Korea and Japan, which were already talking of economic emergency, are now bracing for even greater impacts. In Japan, where stock markets were closed on Monday, jittery traders sent shares tumbling on Tuesday to make up for it; meanwhile, the country is planning for more telework to avoid large gatherings and the spread of the disease. Hong Kong, which hoped to start recovering its central place as a trading hub after months of protest-related disruption, instead saw exports drop off a cliff in January—even before the worst of the new coronavirus had become apparent.

But what’s new and now genuinely making markets worry is the apparent spread of the disease, which seemed as of a week ago largely under control. Iran is now battling an outbreak of the coronavirus with an already decimated economy and with public mistrust of the government at fever pitch. Travelers from Iran have now carried the virus to several other Middle Eastern countries, where experts fear fragile health systems could be overwhelmed if infection accelerates. (Iran’s deputy health minister has contracted the virus.)

At the same time, fears of a global economic slowdown are driving down the price of crude oil to the low $50 range per barrel—bad news for oil-reliant government budgets in Iran, Iraq, Saudi Arabia, and other OPEC powerhouses in the region.

For Europe, the arrival of the coronavirus comes at a particularly bad time, just as struggling economies were starting to climb out of last year’s doldrums and showing signs of recovery.

The growing outbreak in Italy—including the first cases in Sicily—is just another dollop of bad news for an Italian economy struggling to get back to growth. Travel restrictions in the area around Milan, the industrial center of Europe’s third-largest economy, are a kidney punch for an economy already grappling with the slowdown in Germany, a high debt load, an aging population, and endemic corruption. Moody’s rating agency expects the virus to tip Italy into recession this quarter.

Spain, too, is bracing for additional fallout from the virus—which had earlier led to the cancellation of the high-profile, annual mobile phone congress in Barcelona—after nearly a thousand tourists were quarantined in a hotel in the Canary Islands due to fears of infection from an Italian traveler.

In weeks past, economists figured there would be only a minimal hit to growth in fragile European economies because the effects of a slowdown in China were so indirect. Now, BBVA’s Sicilia said, they are starting to tally up potentially direct impacts—closed borders and hotels, quarantined cities, and shuttered factories.

“We’re still in the early phases, but this doesn’t come at a good moment. It’s going to hamstring the recovery a bit,” Sicilia said. “If the outbreak extends, if there are travel restrictions, if people aren’t working—all that goes straight into lower GDP.”

Keith Johnson is a senior staff writer at Foreign Policy. Twitter: @KFJ_FP