Markets are waking up to virus reality

Sharp falls in Asian markets and US stock futures on February 24 suggest investors are starting to catch up to the disconnect between the coronavirus’s widening impact and hopes of a
V-shaped recovery.
It’s a gap that has been particularly visible in metals. China, where much of the economy remains in lockdown, accounts for about half the world’s appetite for materials from iron ore to copper. That makes the sector highly vulnerable to a coronavirus-induced slowdown, and a helpful gauge of how well the reality of economic activity is being reflected in financial markets. The answer? Not enough.
While some larger mills and smelters are working, disrupted transport and absent workers mean physical demand is in the doldrums. Domestic inventories of everything from steel to copper are high. Bloomberg Economics calculated that the world’s second-largest economy was running at 50-60% of capacity in the week ended February 21. That is better than the week before and could well improve over the coming days. Still, it’s a level that seems hard to square with the way shares in miners such as BHP Group, Rio Tinto Group and others have been trading.
Almost all major mining stocks bounced back after February lows, with BHP and peers falling below that only on February 24. They remain well above their troughs last year, when concerns over the US-China trade war rattled the market. Even copper futures on the London Metal Exchange, a reflection of confidence in the global economy rather than just physical demand, have rebounded.
It’s not that investors are brushing off risk. There’s evidence of nervousness to be found in haven assets like gold, which last week broke through $1,600 an ounce. Yields on long-dated US Treasuries have tumbled. More pessimistic commentary is also emerging from company executives.
Investors appear to have been betting on three things. First, that the virus will be contained in the coming weeks. Second, that Beijing will unleash hefty fiscal and monetary stimulus. Finally, that demand impacted by the virus will be deferred, and not simply lost. Unfortunately, none of these things is certain. For metals and resilient equity valuations of their producers, the coming days will be critical.
The hope for a hefty stimulus from Beijing seems broadly to match what China has already said and done. There is already monetary easing and other forms of support, from help with social security payments for small companies to bussing in workers in some provinces. But it’s still unclear what shape the bulk of the fiscal stimulus will take and how heavy it can be in sectors such as property, where the government remains wary of bubbles.
Whether China can contain the virus will be hard to tell for some time, not least given Beijing’s changes to the way cases are reported. It’s unclear what will happen once sealed-off areas begin to open, given epidemics can have more than one peak.
—Bloomberg

Clara Ferreira Marques is a Bloomberg Opinion columnist covering commodities and environmental, social and governance issues. Previously, she was an associate editor for Reuters Breakingviews, and editor and correspondent for Reuters in Singapore, India, the U.K., Italy and Russia