Fear of fear grips markets as spread of outbreak shows no sign of slowing

THE week saw one of the fastest stock-market corrections in history. It could also lead to the fastest bear market, unless economic-stimulus measures can do what central bank stimulus could not - tamp down fear of the coronavirus epidemic.

US stocks finished one of the wildest weeks since the global financial crisis more or less flat, as professionals and amateurs alike were taken on a rollercoaster ride.

But the stock market was tame compared with the Treasury market, where buyers charged headlong into safe-haven long-term bonds. The turmoil looks set to continue this week.

With more than 106,000 cases of Covid-19 diagnosed around the world and the number soaring each day, the question is no longer whether the virus will cause a worldwide slowdown, but how long and deep that slowdown will last.

The violence of the moves was almost comical. Last Monday, the Dow Jones Industrial Average rose by more than 1,000 points. A day later, it gave the guts of those gains back, retreating 785 points.

Wednesday's gains were even bigger than Monday's, and Thursday's selloff even bigger than Tuesday's. On Friday, the stock market gradually calmed but the Dow still lost more than 250 points and closed more than 10 per cent below its record high.

By the end of the week, even Wall Street veterans were throwing up their hands in dismay.

On the Treasury market, the panic was particularly evident, with the 10-year Treasury note yield cut in half on the week and falling below 1 per cent for the first time ever.

Long-term bonds - the very definition of sleepy investments - have never grown so expensive relative to stocks so quickly, said Lorenzo Di Mattia, manager of hedge fund Sibilla Global Fund.

Fear is now in charge of the global markets, or, rather, fear of fear - investors fear that precautions taken by businesses and consumers will cause a sharp economic slowdown. Could the Chinese experience of the last six weeks - with both consumption and production brought to a standstill - be a preview of what is about to happen worldwide? And, if that should happen, can the global economy come back quickly without enduring a painful recession?

It was fear that the coronavirus - and responses to it - would cause a Chinese-style recession that caused some bizarre moments of indifference on the market last week.

First, the US Federal Reserve fulfilled investors' wildest hopes with a bigger-than-expected emergency interest rate cut, and stocks crashed. Then the Labor Department reported a better-than-expected rate of jobs growth in February, and stocks crashed again.

Some strategists see another lesson in the Chinese experience. There are signs the country is slowly returning to normal, and that the virus could peak soon.

To Rich Steinberg, chief market strategist at The Colony Group, any decisions made by investors last week had more to do with panic than economic forecasting.

"We were living in a relatively benign volatility world and now we're not," he said. "That causes stress anxiety and fear... the human psyche is wired to do something."

The furlough in Chinese factories - the workshops of the world - has slowed global trade, with transpacific containership passages slowing dramatically.

Last year's trade war had revealed the dangers of disentangling decades of interlaced supply chains, whereby many products crisscross borders many times before they reach their final destination, meaning that China's problem soon becomes that of the world.

Skyworks, Qorvo and other makers of iPhone components were among those that warned snarled supplies would weigh on their quarterly performance.

Unlike the trade war, the coronavirus shock has implications beyond cross-border commerce.

"The assumption when this began was that this was a supply chain issue. Now it's going to be both a supply chain and a consumption issue," said Mr Steinberg.

The behaviour of US consumers will be "key to whether global recession measured in months not weeks," said strategists at brokerage Bank of America Global Research.

Airline stocks went into freefall after United Airlines said it would reduce international flights by 20 per cent and domestic flights by 10 per cent. The shares of most major carriers are down by 30 per cent or more.

The United Nations' latest estimate was that tourist visits to Asia-Pacific could fall by over 10 per cent this year. Some observers are predicting that 2020 could be the slowest year in modern history for airline travel.

Shares of cruise lines practically capsized, with multi-billion dollar companies Carnival, Norwegian Cruise Line and Royal Caribbean all losing more than half their value since the outbreak started. The cruise industry may never erase the images of thousands of passengers imprisoned aboard ships off the coast of Italy, Japan and San Francisco.

Fear has taken over the oil market, too. Opec countries pledged to cut production by a further 1.5 million barrels a day for the rest of the year, only for oil prices to plunge by their biggest increment since 2014 as Russia declined to join the cartel on its latest move.

Quincy Krosby, chief investment strategist at Prudential Financial, said she would watch the yield on the 10-Year Treasury to see when the panic was subsiding.

Despite the Fed "going from being data dependent to bringing out the sledgehammer", as Mr Steinberg said, markets have retained the sense that governments are not responding with sufficient urgency.

The Group of 20 finance ministers have pledged to act on fiscal stimulus soon. Only a major intervention by the US government or another major power is likely to ease fears this week.

Still, some sense an opportunity to keep their head while markets are losing theirs. "If by chance this virus gets under control in a month or two, as is likely, then these levels would look crazy," said Mr Di Mattia.