Markets & Economy

Global Markets Weekly Update

February 28, 2020


COVID-19 fears drive fastest market correction in history

Stocks suffered their worst weekly decline in over a decade as investors reacted to the global spread of the COVID-19 outbreak (click here for a more detailed discussion of the virus and its potential impact). All the major indexes fell into “correction” territory—down more than 10% from their recent peaks just a week earlier. According to Deutsche Bank Global Research, the S&P 500 Index recorded its fastest correction in history. All the sectors within the S&P 500 suffered a correction as well, with energy stocks faring the worst amid plunging oil prices. Communication services stocks held up the best, helped by some resilience in Netflix shares. The Cboe Volatility Index (VIX) spiked to near 50 on Friday morning, its highest level since the global financial crisis in 2008. The Wall Street Journal reported that stock trading volumes reached a one-year high on Thursday, while options volumes hit an all-time high.

Daily developments lead to almost continuous sell-off

Escalating concerns that the COVID-19 outbreak in China was evolving into a global pandemic led to almost continuous declines throughout the week. Specific developments driving the selling appeared to include widening outbreaks in Iran, Italy, and South Korea (Monday); a warning from health officials that an outbreak in the U.S. was all but certain (Tuesday); reports of quarantines on Long Island, New York (Wednesday); the confirmation of a case in California with no direct ties to China, along with the governor’s announcement that 8,400 people were being monitored for the disease (Thursday); and a caution from acting White House Chief of Staff Mick Mulvaney about possible school closures (Friday). As the declines continued, T. Rowe Price traders also observed the impact of systematic selling by algorithm-driven strategies.

Even as investors braced for a drop in corporate profits, signals about the current health of the economy remained generally positive. Personal incomes rose a healthy 0.6% in January, well above expectations, while durable goods orders fell much less than anticipated. Weekly jobless claims rose somewhat but stayed well below levels seen late in 2019, while consumer sentiment gauges remained elevated. New home sales also rose substantially in January.

Futures markets price in multiple rate cuts

A key question for investors appeared to be whether the Federal Reserve would wait to see concrete evidence of COVID-19’s impact on growth before cutting interest rates. On Friday morning, St. Louis Federal Reserve President James Bullard seemed to contribute to a sell-off in the futures market when he said in a statement that the Fed’s current stance was “in a good position” and that the “baseline case” was for no change in rates. Markets recovered a bit later in the day, after Fed Chair Jerome Powell issued a statement acknowledging that the outbreak was “posing evolving risks,” while promising that the Fed would “use our tools and act as appropriate to support the economy.” Federal funds futures as tracked by CME Group ended the week pricing in a 100% chance of a rate cut by the Fed’s next meeting in March, with a roughly 58% chance of at least a full percentage point of cuts by the end of the year. 

Treasury bond yields hit record lows

Expectations of lower rates and slower growth were also being priced into the Treasury market. The yield on the benchmark 10-year note fell to all-time lows, reaching roughly 1.15% on Friday morning. (Bond prices and yields move in opposite directions.) The yield on the two-year note remained even lower, however, keeping the slope of that portion of the yield curve positive and avoiding the inversion that is typically seen as a harbinger of a coming recession. At present, the federal funds target rate—an overnight lending rate used by banks to meet reserve requirements—is in the 1.50 to 1.75% range.

Virus and growth fears were also reflected in widening credit spreads (the extra yield offered by bonds with credit risk over Treasuries and an inverse measure of the sector’s relative appeal) in the investment-grade corporate bond market. The automotive and energy industries were notable laggards, according to T. Rowe Price traders, who also reported mostly balanced buying and selling activity. No new deals came to the market during the week amid the growing uncertainty.

High yield market feels impact

The firm’s traders also reported that the heavy slate of earnings reports from high yield issuers was mostly irrelevant, as coronavirus fears and the equity sell-off suppressed investors’ risk appetite. Energy bonds underperformed amid a deep drop in oil prices and broad market volatility, which kept most issuers on the sidelines, and only one new deal launched during the week. High yield exchange-traded funds experienced significant outflows.

Meanwhile, the broad municipal market produced strong returns as intense demand for perceived safe-haven assets added to already favorable technical conditions in the tax-exempt market. The largest year-to-date deal―over $5 billion of Buckeye Tobacco Settlement Financing Authority (Ohio) taxable and tax-exempt refunding bonds―repriced to notably lower yields as demand for tobacco-securitized debt remained strong. The refunding deal brought the bonds up to an investment-grade rating. 

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This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.

Source of data: Reuters, obtained through Yahoo! Finance and Bloomberg. Closing data as of 4 p.m. ET. The Dow Jones Industrial Average, the Standard & Poor’s 500 Stock Index of blue chip stocks, the Standard & Poor’s MidCap 400 Index, and the Russell 2000 Index are unmanaged indexes representing various segments of the U.S. equity markets by market capitalization. The Nasdaq Composite is an unmanaged index representing the companies traded on the Nasdaq stock exchange and the National Market System. Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell indexes. Russell® is a trademark of Russell Investment Group.


European shares fell the most since the 2008 financial crisis on fears that the rapid spread of the COVID-19 virus is slowing global economic growth. Most major indexes, including the pan-European STOXX Europe 600 Index and individual country indexes for the UK, France, Germany, and Italy, generally declined 11% to 12%.

COVID-19 Reaches Italy, Threatens Recession

Italian authorities moved quickly to contain Europe’s largest outbreak of the COVID-19 virus, sealing off 11 towns in the northern Veneto and Lombardy regions. The virus claimed 17 lives and infected 655 people in the area, where factories supply key components to European industry. In Milan, the financial and business capital, schools, offices, and tourist sites were shuttered. The southern region of Basilicata imposed a quarantine on people arriving from the north of the country. Italian shares fell more than 11% over the week amid heightened worries of a technical recession in the first quarter, which would be the fourth in 12 years.

ECB Officials Pressure Governments to Ready Fiscal Steps

European Central Bank (ECB) officials in France and Italy indicated that governments must take the policy lead should the COVID-19 virus have a deeper impact on economic growth, Bloomberg reported. Bank of France Governor Francois Villeroy de Galhau said delegates at a meeting of central bank and finance officials spoke about daily monitoring and contingency plans, even if the scenario remains for a V-shaped recovery. He said there was a feeling that monetary policy could not be the sole response and that the policy mix needed to be strengthened. Bank of Italy Governor Ignazio Visco said fiscal policy must be used because monetary policy is already extremely accommodative around the world. He said policymakers should unleash a coordinated fiscal stimulus if the world economy fails to recover from the impact of the virus after two quarters.

In an interview with the Financial Times newspaper, ECB President Christine Lagarde played down the chances of an imminent response to counter the impact of the virus. She said the ECB was monitoring the outbreak “very carefully” and that it was not yet at a stage where it would have a lasting impact on inflation. Eurozone markets now fully price in the likelihood of an interest rate cut at the European Central Bank’s July meeting.

German Business Confidence Unexpectedly Improves

German business confidence unexpectedly strengthened in February, mainly reflecting an improvement in the manufacturing purchasing managers’ index, according to the Ifo institute’s business survey. However, an economist at the institute said that the COVID-19 epidemic was not yet fully reflected in the survey and that Germany as an export nation would be particularly badly affected if the coronavirus becomes a pandemic.


Japanese stocks suffered significant losses for the week amid growing concerns about the economic impact of the COVID-19 coronavirus in Japan and globally. The widely followed Nikkei 225 Stock Average declined over 2,200 points (9.6%) for the week and closed at 21,142.96. For the year-to-date period, the index is down nearly 11%. The large-cap TOPIX Index (-9.7%) and the TOPIX Small Index (-11.6%) also tumbled. Markets were closed Monday for the emperor’s birthday.

Japanese government, private sector try to slow spread of virus

Japan has been relatively hard hit by the virus. As of February 27, the World Health Organization reported that the country had 186 confirmed cases (not including the occurrences on the Diamond Princess cruise ship), which is more than any other country except for China, South Korea, and Italy. Prime Minister Shinzo Abe requested that schools close in an effort to halt the outbreak, and private businesses also took action. Mitsubishi Corporation, for example, asked its employees to work from home for two weeks, and Tokyo Disneyland announced it is closing until March 15. 

Yen, Japanese government bonds strengthen

The yen and the 10-year Japanese government bond (JGB) strengthened for the week amid increased demand for safe-haven assets. The yen gained versus the U.S. dollar as the greenback faced some pressure from increasing expectations of a Federal Reserve rate cut. The JGB’s yield dropped below -0.1% for the first time since the end of November but was less volatile than other high-grade sovereign debt, such as U.S. Treasuries.

Kumar: Rate cut seems unlikely

Aadish Kumar, a T. Rowe Price international economist, said he believes that bond yields in Japan have fallen less than in the U.S. or the eurozone because the market doesn’t think there is a high probability that the Bank of Japan (BoJ) will cut rates unless the yen continues to strengthen versus the U.S. dollar.

Kumar believes that, instead of rate cuts, the BoJ’s most likely action to address an economic slowdown caused by the coronavirus would be to increase its asset purchases, although this could change if the severity of the slowdown significantly increases. In addition, the Japanese government could respond with fiscal measures, such as tax relief for areas hurt by a drop in tourism along with an extension of spending incentives that were put in place before the October 1 increase in the value-added tax.


The rapid spread of the coronavirus to other countries has drawn attention away from China, where recent news has been relatively encouraging. Nevertheless, the spread of COVID-19 was the catalyst for the sharp global sell-off in risk assets, with U.S. equity indices leading the way. China stock indices held up relatively well compared with other markets. But on Friday, the CSI 300 large-cap index and the Shanghai Composite Index both fell by around 3.7%, responding to sharp falls in developed markets on Thursday. From Monday through Friday, they lost 4.7% and 5.0%, respectively, faring significantly better than the S&P 500, which lost more than 11%.

Better News From China

There are encouraging signs that the outbreak may be coming under control in China, even if the ability of the virus to spread rapidly overseas suggests a strong note of caution. Meanwhile, the number of new cases continues to fall, as more than 20 provinces reported no new cases for the sixth consecutive day on February 27.

We are seeing a switch of emphasis in China away from lockdown and quarantine to getting China quickly back to work to reduce the damage to the economy. At the company level, major electronics manufacturer Foxconn said it aims to raise production from 50% currently to 80% by mid-March. This will be welcome news for Apple, the first major U.S. technology company to warn about first-quarter earnings on account of the coronavirus, since Foxconn is a major part of the Apple supply chain. 

Six administrative regions (provinces or municipalities) have downgraded the public health threat from Level I to Level II, including economic powerhouse Guangdong, the second-worst-affected province after Hubei. Wuhan—the epicenter of the outbreak—seems to have jumped the gun, announcing an easing in restrictions on February 23 without Beijing's consent. The decision was reversed just three hours later in what was clearly a policy miscommunication.

Rebound in GDP likely in second quarter, surveys indicate

Much attention has been focused on the high-frequency travel data, which still signal a very slow return of migrant workers. This may have led to too much pessimism with regard to supply chain disruption and hence the shock to manufacturing production. There are many Chinese firms that do not rely on migrant labor and areas of China left relatively unscathed by the coronavirus. 

Official surveys on business resumption conducted in mid-February suggest that over 50% of enterprises with ¥20 million or more in sales had reopened. China's State-owned Assets Supervision and Administration Commission, which oversees large state-owned enterprises, reported a resumption rate of 80%. The China Association of Automobile Manufacturers said 75% of plants were operating by mid-February. Based on these and other surveys, the consensus view of a sharp dip in Chinese first-quarter gross domestic product (GDP) growth followed by a second-quarter rebound appears to be on track. 

China using new technologies in fight against coronavirus

China has been employing some of the country's advances in high tech in the fight against the coronavirus. Alibaba developed an artificial intelligence algorithm that can analyze CAT scans for signs of COVID-19 in 20 seconds, much faster than any doctor. Over 100 cities in China now have an Alipay app that can send a QR code to individuals at risk, advising them to self-quarantine. With schools closed, over 60,000 teachers have given lessons online to 50 million pupils using Dingtalk. In the capital, Beijing, Baidu is using its autonomous vehicles to deliver food and essential supplies to residential units under strict quarantine.

Fiscal stimulus being implemented across Asia

A large number of fiscal stimulus measures were announced across Asia. On Friday, the South Korean government introduced a major package of support measures, although the central bank earlier in the week surprised investors by deciding against a rate cut. Also Friday, China added to its considerable earlier policy support with a temporary but very large ¥650 billion reduction in social security tax. This is aimed at helping smaller and mid-size companies that China's big banks are often reluctant to lend to.

On Wednesday, Hong Kong delivered a HK$120 billion boost, implying a record fiscal deficit of almost 5% of GDP. HK$10.9 billion goes to the Hospital Authority and HK$16.9 billion will provide financial relief to hard-hit sectors, such as Hong Kong's 70,000 retailers and 28,000 food license holders. There is also a HK$10,000 cash payment to all adult permanent residents, plus salary and property tax reductions and low-cost loans to businesses. Malaysia also implemented a RM20 billion fiscal stimulus equal to around 1.3% of GDP, though not all of this was “new money,”' specifically to mitigate the impact of COVID-19 on businesses and households.

Other Key Markets

Brazilian shares tumble as country confirms it first COVID-19 case

Stocks in Brazil, as measured by the Bovespa Index, plunged 9.4%. The market was closed on the first two days of the week for the Carnival holiday—a multiday celebration prior to the beginning of Lent. On Wednesday, the equity market skidded 7%, as investors responded to the deep losses in various world markets, as well as news that Brazil confirmed its first case of the COVID-19 coronavirus. The real also fell to all-time lows versus the U.S. dollar during the week.

Turkish market wavers under virus fears, Russia tensions

Stocks in Turkey, as measured by the BIST 100 Index, plummeted 9.3%. The equity market declined as COVID-19 pandemic fears swept across the globe and pulled world markets lower throughout the week. Investors were also concerned about rising tensions between Turkey and Russia, whose military forces are in close proximity in Syria. Russia is currently backing a Syrian offensive to capture Idlib province, one of the last major rebel-controlled parts of Syria.

On Thursday, Russian state media claimed that Turkish troops and certain rebel groups were attempting to shoot down military planes operated by Syria or its Russian ally. In addition, Turkish media reported that a number of Turkish troops in the Idlib vicinity were killed in an airstrike. Turkey blamed Syria for the attack and threatened to retaliate against Syrian government forces. Turkey also seems to have opened its borders so that war refugees can depart for Greece and other nearby European countries.

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