Its been a Murderous Monday.
Asia has suffered exceptionally sharp selloffs today. Australian shares are down 7.3% at the close, Singapore stocks are off 6.0%, the Topix in Japan has ended with a 5.6% loss.
Virtually every market is down at least 5%. Perversely, China, epicenter of the original coronavirus outbreak, is holding up best, shares "only" down 3.4% for the day.
Very clearly, panic reigns. Traders debate the impact of computerized selling. But given that most trading houses have metrics of "value at risk", and sell off exposure based both on volatility and their revised calculations of assets held, it's clear that selling stock perpetuates more selling. We're in that kind of death spiral.
The yen is approaching ¥100 to the U.S. dollar, currently trading at ¥101 and change, a sure sign that Japanese investors have retreated, and taken their capital with them.
Emerging-market currencies, on the flipside, are feeling the pain. They're down 5% year to date, exacerbating the declines in stocks, real estate and other assets.
Higher-yielding currencies have fared worst, while low-yielding, growth-oriented currencies, a group that includes the Chines yuan, Korean won and Taiwanese dollar, have actually fared better than most. Their surprising strength may stem from their early infection rates, Société Générale notes, "rather than any fundamental resilience."
Asian nations are beginning to roll out stimulus packages that they hope will ward off the worst effects of the Wuhan virus. But so far they are too small in size to make much difference, certainly not enough to stem the stock and currency selling.
Thailand's economic strategists have proposed a 100-billion-baht (US$3.2 billion) package that is due to be approved at a cabinet meeting tomorrow. It includes a wide range of measures, including cash handouts, financial aid for small- and medium-size businesses, and tax benefits.
Farmers, self-employed people and low salary earners will get a 2,000-baht (US$64) cash handout, to be delivered through the national e-payment system. That's likely to reach some 20.8 million people.
Nomura says the incentives should have a positive impact on consumption. They should also ward off the worst downside to sales for retailers and restaurants. But it's really nibbling around the edges of the problem.
South Korea has announced a supplementary budget worth 11.7 trillion won (US$9.8 billion). Landlords will get a tax break intended as an incentive for them to lower rents for small businesses, and the auto exercise tax will be cut. The government will also introduce coupons to boost consumption, and provide financial support for small business.
However, the size of the package is identical to that introduced in response to Middle East Respiratory Syndrome, or MERS, in 2015. That's not comparable to South Korea's outsize impact from Wuhan Acute Respiratory Syndrome, and the Covid-19 virus, which has infected more people in South Korea - 7,478 at last count - than anywhere outside China.
The supplementary budget "is simply too small to address the downside risks from coronavirus," SocGen's Korea economist Suktae Oh says.
Société Générale notes that it saw the potential for a 10% to 15% decline in emerging-market FX in face of significant financial stress. The French bank imagined that would most likely come in the form of a U.S. recession late in this year. Well, now we've got a much bigger stressor, and the likelihood of a global recession now in progress. How much stress would you like at once?
"Last year, there was plenty of evidence that markets were in a late-cycle phase with high levels of mispricing and complacency," Jason Daw, SocGen's head of emerging-markets strategy and Asia Pacific research notes, with low volatility, tight spreads, the belief that stocks could only go up. This meant markets "were ripe for a washout with the appropriate trigger."
I've advised investors to sit on the sidelines, and I'd recommend that they continue to do so. Day traders may make hay on one-day rebounds but the sun is hardly shining.
SocGen uses other metaphors to make the same point. "There are signs of stress in almost every corner of the financial markets," Daw says. It goes on to say that buying dips is a risky proposition with the likelihood of "dead cat bounces," like we saw early last week in equities.
In terms of currency, the yen and the U.S. dollar are the place to hide. Volatility is still mispriced and too low, and emerging-market currencies are still too strong if we are heading into a protracted period of market stress.
Asian stocks will no doubt rebound fast when investors feel confident the outbreak is under control in this part of the world. But the disease continues to spread even if official numbers show very few new infections in China itself.
The bigger problem economically is the impact of China's economy having closed down for weeks at a time. Those business closures are now expanding to Italy's most-industrialized region, and threatening to expand to other economies in the West, too.
"This is not a time to get too fancy and look for cost-effective crisis trades," Daw and the SocGen cross-asset team say. "It is one where you buy dollars and volatility on dips and close your eyes."