Virus Risk No Longer Just a Blip on the Horizon 

(Bloomberg) --

Equities just had their first real wake-up call that risks from the coronavirus could be more than just a blip. Yesterday’s selloff, the biggest in Europe since the aftermath of the Brexit referendum, put an end to optimism that the epidemic would leave only a limited economic impact that could be offset by stimulus. European equities have all but reversed gains made in February, while volatility has also spiked.

“Some realism” is sinking into ebullient equity markets, according to Nordea Investment Funds SA macro strategist Sebastien Galy. While he expects the shock to eventually fade, it indicates the end of the bullish run in equities since October, he says. Over the next few weeks, he predicts that markets will eventually return to a “China-centric economic rebound,” waiting for the next rally.

Looking at technicals, Euro Stoxx 50 futures now are testing an 18-month uptrend, and are back within the downtrend channel they were stuck in during January.

After yesterday’s rout, LCM technical analyst Andy Dodd cut his short position in the contract. The intraday charts had left some bullish signals around the 3650 support, suggesting a rally from there into the close, but that failed to occur. With the future close below the 3650 support, the gauge is now below an uptrend and the resulting candle suggested further downside toward the 200-day MA below.

Dodd notes that should yesterday’s open and closing levels not trade today the resulting candle would be an “inside day,” which is a buy signal, and the future rallied strongly the last time such a candle appeared on Feb. 3.

Yesterday, all but six components of the Stoxx Europe 600 were in the red, the most since August 2015. That knocked the benchmark gauge, which had been set for its best month since June, right off the track.

On the volatility front too, Monday was the biggest stress point since the coronavirus outbreak. The VStoxx Index of Euro Stoxx 50 volatility spiked above 20 for the first time since October. In recent months, most spikes in volatility have been followed by a market bounce.

While bets of fresh stimulus had offset the impact of the outbreak, economic policy can’t do a lot in these circumstances, says Philippe Waechter, chief economist at Ostrum Asset Management SA.

Usually, monetary or fiscal policy are used to limit or to boost the demand momentum, but both are “quite useless” at the moment, he said. “A restrictive policy stance would be negative for the economic activity and a strong accommodation would boost demand in a situation where supply is limited by the epidemic,” he added.

Waechter said freight traffic is slowing down rapidly and ports activity is low and slowing down, meaning that the phenomenon is persistent and that the impact of the epidemic won’t be solved rapidly. Haven assets like gold hitting a seven-year high and accelerating its upward trend are also a sign of investor worries.

To contact the reporters on this story: Michael Msika in London at mmsika4@bloomberg.net;Jan-Patrick Barnert in Frankfurt at jbarnert3@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Namitha Jagadeesh, Phil Serafino

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