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Only One Market Circuit-Breaker May Be Left: Controlling Virus

Only One Market Circuit-Breaker May Be Left: Controlling Virus

(Bloomberg) -- Fiscal packages, emergency interest-rate cuts, central bank asset purchases and liquidity injections have failed to put a floor under the worst stock-market rout since the global financial crisis.

Investors are increasingly concluding the only real circuit breaker left is aggressive moves to contain and treat the coronavirus itself, rather than measures -- however otherwise helpful -- to address the economic and financial symptoms of the crisis.

“People are looking for the macro policy response to offset the damage but ultimately we need to solve the medical issue,” said Richard Yetsenga, head of research and chief economist at ANZ Banking Group Ltd. in a telephone interview. “The epicenter is the health problem.”

The major outperformance of Chinese stocks since the epidemic burst onto traders’ screens in late January strengthens that narrative. Chinese policy makers have taken stimulus steps, as others have, though have stopped short of the scale of interest-rate cuts and asset purchases elsewhere. They did, however, restrict the movement of hundreds millions of people and shut down vast swathes of the world’s second-largest economy for weeks to contain the outbreak.

China’s CSI 300 Index is down just under 5% since the government declared a national emergency the fourth week of January. That’s a lot less painful than the 26 percent rout for the S&P 500 Index. The CSI 300 Friday was down 3.1% as of 10:16 a.m. in Shanghai, roughly a third of the crash on Wall Street the day before.

Countries need to take a close look at their domestic efforts to respond to the virus, said Michael Ryan, head of the World Health Organization emergencies program said earlier this week.

Only One Market Circuit-Breaker May Be Left: Controlling Virus

“If you look at the lessons we’ve learned so far, acting quicker and harder and tougher has been better then acting more slowly,” said Ed Keon, chief investment strategist for multi-asset solutions at QMA Global, on Bloomberg TV.

The U.S., Japan and others have been moving this week to strengthen efforts against the coronavirus, after criticism about insufficient steps in recent weeks. But concerns remain about gaps in authorities’ resources. The lack of widespread testing for the coronavirus is “a failing” of the U.S. public health system, the government’s top infectious disease scientists said on Thursday.

Global stocks are now down over 25% from their 2020 peak -- deep into bear market territory -- with losses accelerating Thursday after stimulus measures from the European Central Bank also disappointed. Even the Federal Reserve’s dramatic injection of liquidity, to counter signs of market dysfunction, failed to stop the equity rout -- U.S. futures continued to slide Friday.

“All the ‘solutions’ we are seeing from the powers that be are reminiscent of the great financial crisis,” said Sue Trinh, global macro strategist at Manulife Investment Management in Hong Kong on Thursday. “Liquidity does not control the spread of this virus. Where are the hospital beds, ICUs, doctors, medical equipment and vaccine R&D?”

The slowdown in new cases in China and lack of fatalities in Singapore show that strong measures to contain the virus can work, but the rapid number of deaths in Italy raise the question over whether Western healthcare systems can cope, wrote Jefferies Financial Group Inc. strategist Christopher Wood in a note Wednesday.

“The best hope for the virus remains that it is seasonal, like the flu, in which case the markets are facing probably only two more months of panic selling,” said Wood. However, even if it is seasonal the base case is also more panic selling because the evidence suggests Western democracies are not equipped to deal with this sort of thing, he added.

“In this context, two months is a long time for panic to spread,” he said.

--With assistance from Naomi Kresge and Haidi Lun.

To contact the reporters on this story: Cormac Mullen in Tokyo at cmullen9@bloomberg.net;Adam Haigh in Sydney at ahaigh1@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Adam Haigh

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