We wrote at the end of January 2020 that the coronavirus had introduced a high degree of uncertainty into how global economic growth would develop over the course of the year. The reaction of markets in the following month demonstrated admirably just how uncertain the situation was and indeed still is.
With clear evidence that the virus could no longer be contained, threatening to tip the world into recession, the surprise was perhaps why equities were so strong in the first half of the month rather than the weakness into the close. What this does demonstrate, however, is the unpredictable nature of the current situation and the inability for companies and financial participants alike to forecast the eventual outcome. Indeed, many companies, particularly those most exposed to the fall-out of the virus such as the travel and leisure sector, chose to withdraw guidance or present the market with ever widening financial forecasts. This is just the kind of uncertainty that spooks markets most and will result in volatile trading until the picture becomes clearer.
For Europe, Italy was the worst hit in terms of the number of confirmed virus cases and with the focus on the industrial heartland of Lombardy in the prosperous north of the country an already weak economy now clearly faces challenges. These challenges will have to be met with a response from authorities and with interest rates in Europe and elsewhere hovering close to or below zero it is highly likely we will see a strong fiscal response in order to support stuttering economies.