It has been a busy start to 2020, with market concerns ranging from war with Iran to the outbreak of a deadly virus in China and a presidential impeachment trial somewhere in between. Despite the headline noise, risk markets performed reasonably well for much of January. However, momentum clearly turned in the final week of the month on coronavirus fears in China. Through January 23, the S&P 500 had a robust MTD return of 3.02%, but the index gave up all gains in the final week, finishing the month with a -0.05% return. The move in Treasuries was more straight-line throughout the month, with strong demand emerging from all investor types amid geopolitical (Iran, impeachment) and coronavirus concerns. Long-end yields fell 40 basis points (bps) in January, and the curve flattened 15 bps.
Fears that a coronavirus outbreak in China could spread globally sparked a risk-off trade in global financial markets over the last week. The deadly virus initially emerged in Wuhan, China, and quickly spread to every part of the China mainland, as well as confirmed cases in 20 countries. One might ask why financial markets would be so concerned about a virus outbreak in one country, and it wouldn’t be an unreasonable question. That said, the markets are ultimately focused on the economic impact of a widespread contagion, particularly when it involves the world’s second largest economy (impact on consumption, manufacturing, etc.). Adding to those concerns was the start of Lunar New Year celebrations in China, which typically involves heavy travel amongst its citizens (i.e., higher risk of widespread contagion).