The first half of February saw developed market (DM) stocks recover quickly from the sell-off at the end of January to reach new record highs. S&P 500 counters wrapped up reporting 4Q19 earnings, which were slightly ahead of muted expectations. It was only really the assets most directly impacted by the novel coronavirus (COVID-19) outbreak in China (e.g. oil and travel-related companies), which were still negatively affected.
However, that all changed dramatically in the last week of the month as it became clear that the virus was starting to spread meaningfully beyond China and Asia, with Italy reporting c. 1,100 confirmed cases and 29 deaths related to the virus by the end of February. The US stock market recorded its worst week since the global financial crisis (GFC), dropping by 11% in the last week of February as DM stocks fell by 10.8% and erased all the gains made in the second half of 2019. Emerging markets (EMs) fared slightly better – down 7.2% for the last week of February, ironically held up by Chinese stocks, which were down only around 4.6%. This as Brazilian, Russian and South African (SA) markets fell by 10.5%, 14.4% and 15.2% in US dollar terms, respectively, with the additional headwind coming from the currencies of those countries which devalued by around 4% during that week. For the month, DMs were down 8.5%, while EMs closed 5.3% lower. Meanwhile, Hong Kong-listed Chinese corporates were up 0.2% in aggregate in US dollar terms for the month.
US 10-year bond yields dropped to record lows, ending the month at 1.15% – down 0.35% for the month and 0.75% YTD as the market rushed to price in at least two rate cuts from the US Federal Reserve (Fed) over the next few meetings, so expectations are now fairly high that central bankers will step in to support markets. China is the world’s biggest importer of oil, accounting for about 15% of global demand and, despite signs that OPEC+ will respond to the demand weakness with supply cuts, the price of Brent crude oil is now down almost 25% to c. $51/bbl since 21 January when news first broke of the COVID-19 outbreak.