It may be too soon for investors to dive into the relief rally that’s seen global equities rebound sharply this week from a the selloff inspired by worries over the economic impact of China’s coronavirus outbreak.
Bond-market analysts say the uncertainties around the eventual damage the coronavirus could inflict on the second largest economy in the world suggest the stock-market bounce is premature. Even as the number of confirmed cases has leapt day by day, investors have taken comfort in Beijing’s measures to contain the crisis and the economic tools it has deployed to arrest panic in its own financial markets.
“Global stocks are groping for the ‘worst is past’ signal, but today seems too soon to make that call, based on the virus’s growth path this week,” said Jim Vogel, an interest-rate strategist at FHN Financial.
Around 20,000 people have been sickened and at least 425 have died in China, according to the country’s National Health Commission. The World Health Organization has reported 20,630 cases in 24 countries as of Feb. 4.
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In the past two days, the People’s Bank of China has injected around 1.7 trillion yuan in the banking system to boost lending to ailing businesses. Economists also expect China to unload further fiscal stimulus measures in the first half of this year.
Those efforts helped to revive appetite for risk assets in U.S. and European equities. The S&P 500 SPX, +1.66% and Dow Jones Industrial Average DJIA, +1.68% are both up more than 2% this week, taking back the ground lost in Friday’s rout. The Stoxx Europe 600 index SXXP, +1.64% is up 1.8% in the past two days.
The China CSI 300 index 000300, +2.64% also recorded a 2.6% gain on Tuesday following a 7.9% drop on Monday, its largest such decline since August 2015.
The 10-year Treasury note yield TMUBMUSD10Y, +4.70% surged around 8 basis points to 1.6% on Tuesday, albeit a day after touching a four-month low of 1.52%, based on Tradeweb data. Yields and debt prices move in opposite directions.
The yield on the benchmark maturity is still down more than 30 basis points from where it traded at the beginning of 2020, reflecting, in part, haven demand for government paper as coronavirus worries jumped.
Meanwhile, a number of economists say the hit to Chinese growth is expected to be substantial amid disruptions to travel, retail and local industry. Société Générale is forecasting China first-quarter gross domestic product growth to slow to 4.5%, but rebound in the following period.
The U.S. economy, however, has a record of resilience against global economic shocks, supported by brisk consumer spending. But bond-market bulls feel the underpinnings of domestic growth are shakier than headline numbers suggest. The U.S. expanded at a 2.3% clip in 2019.
“The domestic economy still faces challenges,” said Maryann Hurley, a bond trader at D.A. Davidson, in emailed comments. “It is uncertain how long the consumer can be the major support for the economy.”
Personal consumption dropped markedly in the fourth-quarter of 2019 to 1.8%, from an annualized pace of 3.2% in the third-quarter.
Some of this caution is based on the warning signal sent by long-dated Treasury rates, which temporarily fell below their short-term peers last week. This bond-market phenomenon, known as a yield-curve inversion, has historically portended an economic downturn in U.S. postwar history.
Though the slope of the yield curve steepened in line with the rebound in stocks, it remains close to inverted levels. The spread between the 3-month bill TMUBMUSD03M, +0.32% and the 10-year note TMUBMUSD10Y, +4.70% stood at a positive 3 basis points, after dipping into negative territory at the end of last week.
“Whatever disruption this virus spread brings, the impact is temporary and will mostly go away in a few months but I can’t ignore what the yield curve is saying in terms of its belief on the trajectory of growth,” wrote Peter Boockvar, chief investment officer at the Bleakley Advisory Group.