Why Are Markets Rallying Despite Coronavirus?

Equities Shrug Off Coronavirus Risks

Looking at the recent march higher in equities prices, there is little evidence to suggest the world is currently experiencing an outbreak of a deadly disease. The coronavirus infection named COVID-19, saw its first confirmed cases in China in December last year. Since then, the virus has spread to: all 31 provinces in China, across 16 countries in Asia, and across 28 globally with over 500 confirmed cases outside of China.

Death Toll Increase Mainly Confined to China

The hardest hit is China itself. The latest data released from the Chinese National Health Commission over the weekend noted that as of Sunday the number of new cases rocketed by over 2000 country-wide. 1900 of these in Hubei province. The death toll in China had jumped to 1,770. This was a 105 victim increase from the previous day. The majority of deaths in China continue to be located in Hubei province. This is home to the city of Wuhan where the virus was first confirmed.

Global Impact Reduced

Despite the increase in cases and deaths in China, the global spread has been far slower. Deaths outside of China are limited to 5 so far. The far lower mortality rate is a key driver behind the resilience in equities and commodities markets. As news of the virus broke, risk assets were hard hit initially  However, over the last few weeks, it has become clear that the harshest impact of the virus has been limited to China.

Chinese Data in Focus

Risk assets have been able to recover with the global impact of the virus now projected to be far less than originally anticipated. The main focus is now on how much damage the Chinese economy will suffer as a result of the virus. Incoming data sets over this month and next will be highly important. The risk is of plenty of volatility in risk assets. The PBoC has been active in easing to help buffer the economy. However, given the scale of the drop in activity there, data sets could be significantly weaker. This could then start to feed through into resumed downside in equities and commodities prices.

Technical Perspective

The SPX500 continues to rally into fresh highs. However, the break above the 3358.86 level has been labored. Price action is now moving within a rising wedge pattern. With the RSI indicator showing bearish divergence, there is now a risk of a reversal lower. This could see price quickly retesting the 3358.86 level. Below there, the next level to watch is the 3337.75 zone.