The Global Equity Systemic Risk Index, a measure of market fragility, was reported to have the most extreme jump in four years last week.
State Street Global Markets’ (SSGM) head of macro strategy for EMEA Tim Graf said the escalation in risk was “due to drivers of volatility such as coronavirus fears and markdowns to global growth”.
State Street’s analysis said the hike highlighted the “heightened fragility apparent from the recent movements of ‘risky asset’ prices”.
“If we calculate a faster moving rate of change of this index, the compressed jump over the last week is exceeded only by that seen during surprise yuan devaluation of August 2015,” Mr Graf said.
“Investors would do well to consider owning safe havens and limiting risk exposure for longer than most other volatility events might have warranted.”
The global death toll for coronavirus surpassed 3,000 on Tuesday morning, with now more than 90,000 infections recorded.
The OECD warned that global growth could fall to levels not seen in more than a decade as the outbreak affects demand and supply, cutting its full-year growth forecast from 2.9 per cent to 2.4 per cent, the weakest since 2009.
Frank Uhlenbruch, investment strategist on the Australian fixed interest team at Janus Henderson said the widened reach of the virus has changed the outlook from an optimistic moderate recovery for global and domestic growth as geopolitical tensions and monetary easing lessened.
Now, he said, the forecast looks more uncertain, with elevated near-term recession risks.
“The virus is a supply side shock, with output and hours worked lost as regions are quarantined,” Mr Uhlenbruch said.
“Once the virus has passed, production will recommence and hours worked may be boosted by overtime as producers try to catch up on lost production and fill backorders.
“The challenge for policymakers is how to respond to a global biological shock.”
He noted at some point a vaccine will become available and output will normalise, but for now, the virus has already started to penetrate the demand side of the economy.
“There are early signs of this [virus affecting demand], with a sharp deterioration in financial conditions, which if persistent, could lead to a loss of business and consumer confidence. Both easier fiscal and monetary conditions could play a role in stabilising confidence and supporting activity,” Mr Uhlenbruch said.
“There is scope for central banks to provide some insurance and fiscal policy to provide targeted support to sectors under pressure. That said, we see some signs that what is a temporary shock (reports are that a vaccine will be available in a year or so) is being priced in over longer time periods.”
The RBA on Tuesday decided to cut the cash rate by 25 basis points to 0.5 per cent, in a bid to support the economy as it responds to the global coronavirus spread.
Governor Philip Lowe stated the contagion had clouded the near-term outlook for the global economy, with global growth in the first half to be slower than expected.
“The global outbreak of the coronavirus is expected to delay progress in Australia towards full employment and the inflation target,” Mr Lowe commented.
“The board therefore judged that it was appropriate to ease monetary policy further to provide additional support to employment and economic activity.”
He added the RBA will continue to monitor the virus and assess its economic implications.
Other central banks around the world, including ECB, Bank of England and Bank of Japan committed to take action in the face of economic impacts from the virus.
Markets are also leaning towards a rate cut from the US Federal Reserve this month.
Sarah Simpkins
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].
