Coronavirus Woes Deepening: Why now?

Coronavirus Woes Deepening: Why now?

Questionable Dip?

The worst seems to have passed for China, with daily cases of COVID-19 reaching new lows. However, the markets have not reacted favorably to this news and instead, we observe several equities and commodities reaching new lows.

One of the biggest questions investors faced on Monday is: “Why now?”. Indeed, most investors would expect markets to react violently when cases of COVID-19 peaked in China, with the cause and means of transmission remaining largely unknown. This can be easily explained: The trade war has already caused enough damage to the Chinese economy and most investors have priced in China’s declining economic growth. Another blow to the Chinese economy will not have a large impact on investors’ sentiments.

Widening Global Impact

Monday’s equity slide is a reflection of investors’ concerns over the global economy. The true impact is increasingly obvious as major companies report missing sales and profit earnings. Microsoft has also issued a financial warning statement on the 27th of February, a week after Apple did so. The list of companies affected by the coronavirus outbreak has been rapidly expanding, comprising corporate giants such as Disney, Qualcomm, and Walmart.  

The spread in South Korea has been a major cause for concern. The outbreak which was largely contained within China, exploded in South Korea, with over 1200 cases reported as of 27th February 2020. The number of new cases discovered outside China also surpassed the number of new cases discovered within China, sparking a new wave of global panic. Yellen, former chair of the Federal Reserve, also stated that the coronavirus outbreak could tip the U.S economy over the brink into a recession.

Figure 1: S&P Index (Source – Reuters)

The steep sell-off on Monday led to the biggest drop in the S&P index in almost 5 months. Within 2 days, the index plummeted 6.3%. This was also accompanied by a plunge in the Nasdaq Composite Index and the Dow Jones Industrial Average Index. As mentioned previously, the index was in an overbought state. The coronavirus global outbreak was merely the breaking point. We do expect bearish conditions to persist. Further sell-offs could occur once there are observable impacts on corporate earnings and economic growth.

Opportunities for the Average Retail Investor

To quote Larry Kudlow, “The virus story is not going to last forever”. Volatility in the market equates to opportunity, and retail investors such who were previously looking to buy into the various indices will now find that it’s cheaper to do so. Besides, with the introduction of the Micro Indices contracts, the margin required to be paid upfront is much smaller relative to the Mini Indices contracts.

From now till 30 June 2020, you can trade US Micro indices at only USD1.50! Additionally, you stand to receive more than SGD500 when you trade with Phillip Futures during the promotional period. Please feel free to contact us for further information.