Markets mixed, coronavirus outbreak could yet form “a big enough shock”

Markets were mixed on Monday.

The Shanghai Composite plunged 7.7 percent as the Chinese stock market opened for its first day of trading after the Lunar New Year holiday but the S&P 500 rose 0.7 percent and the STOXX Europe 600 rose 0.3 percent.

Boosting stocks in the US was a report showing that the Institute for Supply Management's manufacturing index rose to a six-month high of 50.9 in January.

Meanwhile, the Markit/Caixin manufacturing PMI for China came in at 51.1 for January at 51.1, down from 51.5 in December.

The coronavirus outbreak in China, though, remains a potential threat.

“Overall, the economic data is still okay, and not likely to change for another month or two,” said Paul Nolte, portfolio manager at Kingsview Asset Management. “Then, we might see some impact of the virus work its way through the data.”

Indeed, Neal Shearing of Capital Economics said that market participants who are looking to the 2002-2003 outbreak of severe acute respiratory syndrome, or SARS, as a guide to how the current situation will unfold may be too sanguine.

“First, given the size and importance of China’s economy, the impact on the global economy is likely to be more significant than in previous epidemics (including SARS),” Shearing wrote. “The steps to contain the virus – rather than the virus itself – are causing most of the economic damage.”

“The SARS virus hit at a time when global stock markets were starting to bottom out following the bursting of the dot-com bubble,” he added. “The potential for the virus to trigger a significant market correction is much greater now than it was back then.”

Similarly, Mohamed El-Erian, the chief economic adviser to Allianz, said the effects of the outbreak are substantial in China and will slow global growth. With the gap between elevated asset prices and weaker economic conditions “increasingly unsustainable”, the outbreak could form “a big enough shock that fundamentally shifts sentiment”.