On Wednesday Federal Reserve Chair Jay Powell answered questions and commented on the Fed's latest decision to leave interest rates unchanged. He also addressed the elephant in the room, the coronavirus: "There is likely to be some disruption to activity in China and possibly globally based on the spread of the virus to date and the travel restrictions and business closures that have already been imposed." While no one expected Powell to scream "the sky is falling," his comments, read through a "Fed filter," are not far from that interpretation.
Markets reacted to his statements, and Hong Kong's benchmark Hang Seng index fell nearly 3% Thursday. As the death toll and total infections rise, investors globally fear what is to come. Powell finished his remarks on the topic by saying "In light of that uncertainty I'm not going to speculate about it at this point" referring to the potential economic impact of the virus. Uncertainty is a great way of describing what we're experiencing and markets aren't taking any chances.
Copper has sold off for 12 days straight, a record in that commodity, which is most closely correlated to manufacturing sentiment. If investors fear the virus will spread and demand will decrease in manufacturing, so too will the demand for copper. Crude oil prices are also down as major airlines continue to cancel their flights to China. Should the trend continue and the virus spread, travel restrictions to China will only increase which will mean further uncertainty.
India confirmed its first case of the coronavirus on Wednesday as the total death toll rose to 170 people globally while the number of infected people reached 7,800. While all deaths are currently restricted to China, as the virus continues to spread, there will inevitably be deaths in other countries too. While the death rate is relatively low, 2.1% according to the World Health Organization, the spread of the virus is much faster than the deadly SARS virus, which had a death rate of 9.6%.
Powell's comments on the expansion of the Fed's balance sheet by nearly half a trillion dollars and the change in language of the Fed's statement all point to further accommodative interest rates for the foreseeable future. Having said that the biggest threat right now is the uncertainty linked to the coronavirus. Ironically the hysteria around the virus may have been caused by the Chinese authorities' immediate lockdown of the infected areas, which was a great step in restricting its potential spread.
In the coming years, it appears that investors may be blindsided by these kind of tail risks. In the event these risks turn into actual crises, will any type of insurance against a downturn be enough to mitigate losses? The coronavirus will either end up being a short burst of hysteria catalyzed by social media into an all-out panic that fizzles and dies along with the virus itself or it may actually turn into something major. At present, the low death rate and steps taken to stop its spread appear to favor the former outcome. Whatever the result, best practices will emerge which will leave us better equipped to prevent future pandemics or to face them should they develop.