What Could Go Wrong?

Global equity markets were up by roughly 1% on the week with technology stocks leading the way again. Year to date stocks are up roughly 3-4%. Many investors have been a little surprised by how quickly markets have recovered from the COVID-19 virus scare.

For example, the recent equity market peak for Asia ex-Japan was on 17th January. After falling 8% to its low on 3rd February, regional Asian markets have recovered over half their virus outbreak-driven losses and are up modestly year to date.

Although the recovery looks rational, it appears to have come earlier than expected. There is widespread awareness that, in previous virus outbreak episodes, markets tended to trough when the momentum of new infections peaked. Official data show that the rate of new confirmed infections has been moderating since February 5th – obviously excluding the jump in cases on 12th February due to reporting methodology changes. Hence, why markets have acted rationally so far.

A critical two weeks

It is clear that the Chinese authorities are determined to arrest the epidemic by the end of February. Since the outbreak, the central bank of China has cut interest rates and injected liquidity into the financial system whilst the government has front-loaded the local government bond issuance quota ahead of the People’s Congress in March. However, a key risk is that most businesses are attempting to restart normal operations this week after an extended holiday break, which could lead to a new wave of infections. This means that the situation in the next two weeks is still critical to monitor.


Sanders steps forward

Another risk on the horizon is the US presidential election. Joe Biden was thought to be the frontrunner for the Democrats, but he is doing very badly. If he does not win in South Carolina on 29th February, he may have to drop out of the race. Sanders won by a slim margin in New Hampshire but he should have won by a greater one given he spent $5.3m on TV ads versus the next biggest spender, Mayor Pete Buttigieg, on $3.6m.

However, investors will have to wait for ‘Super Tuesday’ on 3rd March to see how Mike Bloomberg gets on since that is when he enters the race. Based on current information – of course things can turn on a dime and it is super early to make any predictions – it looks like Trump will face either Bloomberg or Sanders. Equity markets would be much more sanguine about Bloomberg being the Democratic candidate as opposed to Sanders, who some commentators see as extreme and possibly not market friendly.

Some see Sanders as simply unelectable in a head-to-head race against Trump but, as markets know, unelectable candidates do get elected – look what happened in 2016!

The Predictit market puts a Republican victory at a 56% probability, which represents a sharp improvement over the last two months but is still nothing like a shoo-in. The current belief amongst commentators and analysts is that Trump is the more market friendly candidate, which is why this is a key metric to follow in the weeks and months ahead.

© 2019 GWM