Coronavirus: Markets rally – is it growing bubble or knee-jerk reaction?

By Nigel Green. Published at Feb 7, 2020, in Market Wrap

Global financial markets are shrugging off uncertainty regarding the serious and ongoing international issue of the coronavirus outbreak – but beware of a bubble, warns the CEO of one of the world’s largest independent financial advisory organisations.

US stocks closed on Wednesday at record highs, as the FTSE 100 and European stocks staged a comeback after taking their cues from Asian markets.

The markets’ reaction is in response to claims by China that they are progressing towards a coronavirus vaccine and to the plans by the country’s central bank to support the vulnerable economy by pumping in liquidity.

A serious and ongoing issue, such as coronavirus, and the major uncertainty it causes, would typically send global financial markets in to a tailspin.

Whilst the coronavirus remains the number one threat to financial markets currently, they seem to be buoyed on Chinese state media reports of a breakthrough in attempts to find a cure to the current strain.

However, these claims have been largely dismissed by the World Health Organisation, confirmed cases and the death toll are rising, and countries across the world are ramping up precautions and preparations for coronavirus.

With this in mind, the question is posed: Is this a simple knee-jerk reaction from the market on some positive news? Or is there a classic bubble situation developing in some financial markets?

It would seem investors are showing signs of displacement – when they become enamoured with a new invention, technology or, in this case, a cure – which can lead to a boom and euphoria, when asset prices skyrocket. These are all stages of a classic bubble situation.

Investors should monitor the situation carefully. The true economic fallout of the coronavirus outbreak will not be known for some time.

However, we do know that it is going to have a serious, negative and far-reaching impact on China’s economy, which is already severely burdened by the prolonged trade dispute with the US.

Of course, this multifaceted, downside trajectory of the world’s second-largest economy can be expected to have adverse knock-on effects for the fragile and largely interdependent global economy. Indeed, it could stall it.

Knee-jerk reaction or growing bubble? Time will tell.

But despite the alleged progress on coronavirus and despite the stimulus announced by China’s central bank, China’s already fragile economy, and the flimsy phase-one US trade deal could create the perfect storm to trigger a significant economic global slowdown.

This would suggest that investors should now take steps to mitigate risks to their wealth.

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