The market focus has clearly become centered on the Wuhan coronavirus and what impact it may have on the Chinese, and therefore the global economy as a whole. Other news items such as Trump’s impeachment hearings pale by comparison.

The last time that the World Health Organization grappled with a serious outbreak of a coronavirus was the SARS outbreak of 2002/2003, which lasted about 6 months and had significant loss of life and impact on the Chinese economy. Therefore, it’s worth having a look at the data and timelines associated with SARS and compare and contrast this with what’s being called the Corona Virus.

 What does the data show us?

As can be seen by the charts below (thank to our friends at (Exante data) the number of reported cases and the number of deaths due to the Corona Virus have now surpassed that of SARS over the same time horizon since the beginning of the outbreak. This may grow even more quickly as the research is showing that the incubation period for the Corona Virus is longer than that of SARS, so there may be more people already incubating the virus but not yet showing symptoms.

Charts 1 through 4:  SARS vs the Corona Virus since the beginning of the outbreak

How have the markets reacted this time vs last?

One key difference between the SARS outbreak and the Corona Virus outbreak is the media coverage of the disease.  Remember that in 2003 we did not have the prevalence of social media platforms and other web-related sources of information transfer like we do today.   That may partly explain why the new coverage for the Corona Virus has been much higher than it was for SARS (black line vs the green line in the chart below). The impact however is that the world has focused more quickly on the Corona Virus than it did on SARS. Awareness impacts behavior, and therefore we may see a greater impact on market behavior this time around. 

Chart 5: News Coverage in the First 100 Days of an Epidemic

The most likely impact on the behavior of consumers will be travel to Asia.  China, being the epicenter of the virus, will be the hardest hit, but other countries such as Thailand which relies heavily on tourism and travelers from China for its GDP, will feel the pain as well.  During SARS, declines in Asian tourism were significant.  There are also concerns that the Chinese economy as a whole may be at risk for productivity declines should this outbreak accelerate but given the size of the Chinese economy and the size of the worker population, this is unlikely to have a significant impact.  However, the market is assigning a much higher risk to the Chinese economy and expressed this through USD buying vs CNY over the past week as the death toll has risen.  See chart 6 below.  The market is watching closely to see if the PBoC will defend the key 7.0000 level.

We cannot compare this to the SARS outbreak, as CNY was pegged to the USD back in 2003.

Chart 6: USDCNY since Jan 1 (Source: Bloomberg)

As can be seen from Chart 7 below, oil, which is correlated to air travel, has taken a significant hit since the second week of January, although the attribution specifically to the Corona Virus is difficult to quantify.  OPEC is considering additional supply cuts to counter the price decline.

Chart 7: Oil Prices since Jan (Source: Bloomberg)

Currencies highly correlated to oil prices, like CAD and NOK, have taken a hit as well.

Chart 8: CAD vs USD since the beginning of Jan (Source: Bloomberg)

So, risk is clearly elevated and safe-haven currencies including the USD are benefitting from these flows.  The broad USD index has appreciated by 1.6% since the beginning of January.  The question is: based on the experience during the SARS crisis, should this broad buying of USD continue?  Looking back at the performance of the USD index during SARS, one could draw the conclusion that other factors will have a larger impact on the USD than just the outbreak, as Chart 9 below shows that the USD in fact declined during the 6 months of the SARS outbreak.

Chart 9: USD Index 2002/2003 (Source: Bloomberg)

What is the conclusion?

Based on the historical comparisons and the market forces thus far since the Corona Virus outbreak, our conclusions are;

· CNY will continue to be under pressure, and a close eye must be kept on the PBoC and whether they will defend 7.0000

· Asian countries reliant on travel, specifically from China, will likely see their currencies remain on the back foot

· Oil will remain under pressure unless OPEC can stem the decline

· Oil producing countries such as Canada and Norway will see their currencies suffer

· It is very difficult to predict the impact on the USD as a whole, but as long as the market is searching for safe havens, it will benefit in the short run.