(Bloomberg) -- Financial markets in Asia reeled on concern a deadly virus emanating from China will spread through the region. Moves were exacerbated as traders closed out positions in the run-up to Lunar New Year holidays.
Chinese shares in Hong Kong headed for their worst day since October 2018, while global traders offloaded more than 7 billion yuan ($1 billion) of mainland shares through exchange links. MSCI Inc.’s Asian gauge dropped 1%.
The virus is another test for a bull run in global equities, which rose to record last week after shrugging off concerns of a wider conflict in the Middle East. Four people have died and a number of medical workers have been infected by the new illness, which emerged in the city of Wuhan. It has since been detected in people in Japan, Thailand, South Korea, as well as other parts of China.
“It is uncertain how the virus outbreak will develop in China during the holidays,” said Jackson Wong, asset management director at Amber Hill Capital Ltd. “We are holding more cash and we are avoiding travel-related stocks and some technology stocks that had already jumped a lot earlier.”
The Hang Seng China Enterprises Index slumped more than 3% in Hong Kong, where equities were also hit after Moody’s Investor Service dowgraded the city’s rating and China’s new top official in Hong Kong urged the city to enact national security legislation. The CSI 300 Index of stocks in Shanghai and Shenzhen dropped 1.7%.
The reaction seeped into broader global markets. S&P 500 Index futures fell 0.4%, while the dollar climbed against all but two of 16 major peers. The yuan slid 0.5% offshore to weaken past 6.9 per greenback. The 10-year U.S. Treasury yield declined three basis points to 1.79%.
“The bigger concern would actually be if it starts to spread to other Asian countries,” says Khoon Goh, head of Asia research at Australia & New Zealand Banking Group in Singapore. “If it is serious enough to impact tourism, then other currencies in the region will be more vulnerable.”
Airlines and travel companies were some of the biggest stock losers in the region, with China Eastern Airlines Co. and China Southern Airlines Co. tumbling more than 6%. Makers of medical equipment surged. Chinese financial markets will be closed for week from Friday, when hundreds of millions of Chinese will travel across the country and globally for holidays.
“Right now, it’s just people placing bets either way -- which makes sense in a market like the one we’ve seen in the past couple of months with mostly short-sighted money chasing returns based on this thematic play or that,” said Chen Yicong, fund manager at Beijing Chengyang AMC Ltd.
Health-care workers contracting the new illness indicates that it is more easily transmitted than previously thought. That takes the disease -- part of the coronavirus family -- to a higher risk level, reminiscent of the Severe Acute Respiratory Syndrome, or SARS, pandemic in Asia 17 years ago that killed 800 people.
Back then, China’s tourism, transportation and retail sectors were heavily hit as people stayed home; domestic consumption fell sharply, as did real estate prices and financial markets. The epidemic subtracted an estimated 0.8 percentage point from gross domestic product growth in China in 2003, according to a China Daily report that cited a National Bureau of Statistics official. A 2003 academic study estimated the global economic cost at close to $40 billion or more.
Scale of Magnitude
While that epidemic had an outsized impact on Hong Kong assets, it barely caused a ripple in global assets. The swings in major currencies and bonds such as the yen and Treasuries were more dependent on central bank policies, such as a June Federal Reserve rate cut, or economic indicators including signs of continued deflation in Japan.
“There is no doubt that eventually the virus will be contained -– it’s just a question of when, and does it scale in magnitude,” said Kay Van-Petersen, global macro strategist at Saxo Capital Markets Pte. in Singapore. “Hard to see a case where this becomes super negative for Chinese (and proxy Hong Kong) equities, unless it somehow induces local panic selling – yet things would have to get dramatically worse for such a scenario.”
--With assistance from April Ma, Ruth Carson, Jeanny Yu, Chikako Mogi, Chester Yung, Abhishek Vishnoi and Tomoko Yamazaki.
To contact Bloomberg News staff for this story: Richard Frost in Hong Kong at rfrost4@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
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