(Bloomberg) — A deadly virus emanating from China helped bring this year’s global risk rally to a halt on Tuesday, hammering Asian equities and helping drag both European stocks and U.S. futures lower.
Traders closing out positions in the run-up to Lunar New Year holidays may have accelerated moves in Asia, where Hong Kong equities slumped 2.8% and the MSCI Asia-Pacific Index dropped more than 1%. Luxury stocks in Europe, many heavily exposed to the Chinese market, slid on concern the outbreak will disrupt travel and spending in the key holiday period.
“It is uncertain how the virus outbreak will develop in China during the holidays,” said Jackson Wong, asset management director at Amber Hill Capital Ltd. “We are holding more cash and we are avoiding travel-related stocks and some technology stocks that had already jumped a lot earlier.”
The outbreak is the latest test for global equities, which have notched multiple record highs since the start of the month. Over the past year bulls have braved everything from oil price spikes and Middle East tensions to the repo blow-up and the trade war — lulled by continued economic growth and monetary stimulus.
By 6:24 a.m. in New York, futures for the S&P 500 were pointing to a drop at the open, though declines were more measured than for European and Asian stocks. Previous viral episodes like SARS spurred a pullback in America’s benchmark gauge, but the index rebounded quicker than its Asian peers.
The Hang Seng China Enterprises Index tumbled more than 3% in Hong Kong. Declines there were exacerbated by a Moody’s Investor Service downgrade of the city state’s rating, while China’s new top official there urged policy makers to enact national security legislation. The CSI 300 Index of stocks in Shanghai and Shenzhen dropped 1.7%.
Airlines and travel companies were some of the biggest losers. China Eastern Airlines Co. and China Southern Airlines Co. each tumbled more than 6%. Makers of medical equipment surged. Chinese financial markets will be closed for a week from Friday, when hundreds of millions of people will travel across the country and globally for the holidays.
“Right now, it’s just people placing bets either way — which makes sense in a market like the one we’ve seen in the past couple of months with mostly short-sighted money chasing returns based on this thematic play or that,” said Chen Yicong, fund manager at Beijing Chengyang AMC Ltd.
In Europe, LVMH Moet Hennessy Louis Vuitton SE dropped about 2.9% and Kering 3.8% on concern the virus will disrupt travel and spending. Duty-free store operator Dufry AG declined to the lowest level since November. The impact was also felt beyond equities: Treasuries gained alongside the yen as investors opted for safer assets.
“The bigger concern would actually be if it starts to spread to other Asian countries,” says Khoon Goh, head of Asia research at Australia & New Zealand Banking Group in Singapore. “If it is serious enough to impact tourism, then other currencies in the region will be more vulnerable.”
Health-care workers contracting the new illness indicates that it is more easily transmitted than previously thought. That takes the disease — part of the coronavirus family — to a higher risk level, reminiscent of the Severe Acute Respiratory Syndrome, or SARS, pandemic in Asia 17 years ago that killed 800 people.
Back then, China’s tourism, transportation and retail sectors were heavily hit as people stayed home; domestic consumption fell sharply, as did real estate prices and financial markets. The epidemic subtracted an estimated 0.8 percentage point from gross domestic product growth in China in 2003, according to a China Daily report that cited a National Bureau of Statistics official. A 2003 academic study estimated the global economic cost at close to $40 billion or more.
While that epidemic had an outsized impact on Hong Kong assets, it barely caused a ripple in global assets. The swings in major currencies and bonds such as the yen and Treasuries were more dependent on central bank policies, such as a June Federal Reserve rate cut, or economic indicators including signs of continued deflation in Japan.
“There is no doubt that eventually the virus will be contained -– it’s just a question of when, and does it scale in magnitude,” said Kay Van-Petersen, global macro strategist at Saxo Capital Markets Pte. in Singapore. “Hard to see a case where this becomes super negative for Chinese (and proxy Hong Kong) equities, unless it somehow induces local panic selling – yet things would have to get dramatically worse for such a scenario.”
–With assistance from April Ma, Ruth Carson, Jeanny Yu, Chikako Mogi, Chester Yung, Abhishek Vishnoi, Tomoko Yamazaki, Justina Lee and Greg Ritchie.
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