ASX shaky as coronavirus strikes

The wave of selling that stormed global sharemarkets on Friday is set to spread to the local bourse on Monday.

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The wave of selling that stormed global sharemarkets on Friday is set to spread to the local bourse on Monday as fears grow over the rapid advance of the new coronavirus and its potential to drag on global growth.

ASX futures were pointing to a 1.7 per cent drop at the open, as investors weigh up the risks posed by the outbreak and watch for what could be a brutal session on China’s equity markets, which resume trading on Monday following an extended break for the Lunar New Year holiday.

The death toll from the coronavirus epidemic has topped 300, while the number of infected has risen to 14,380, according to the latest figures from Chinese officials. The bulk of the infections and all but one of the deaths to date have taken place in China, with nations around the globe resorting to drastic action, including strict travel restrictions, in a bid to stem the spread of the virus.

US sharemarkets tumbled on Friday, giving up their January gains, as President Donald Trump declared a US public health emergency, restricting entry into the country and ordering a 14-day quarantine for citizens returning from the Hubei province in China.

The Dow Jones and the S&P 500 both suffered their biggest one-day falls since August, with the Dow tumbling 2.1 per cent to 28,256.03 and the S&P 500 losing 1.8 per cent to 3225.52. The Nasdaq fell 1.6 per cent to 9150.94.

Meanwhile the yield on US 10-year Treasuries slumped 14 basis points to 1.5 per cent, near record lows.

In London, the FTSE shed 1.3 per cent on Friday, reversing all of its post-election gains despite optimism over Britain finally exiting the EU, while Germany’s DAX lost 1.3 per cent.

Australia has imposed its own restrictions on travel, with Prime Minister Scott Morrison on Saturday announcing that foreign travellers who had left or passed through mainland China en route to Australia would be denied entry.

Federal Treasurer Josh Frydenberg on Sunday said it was too early to say how much of an impact the coronavirus would have on the economy. But he noted that the 200,000 Chinese students and 1.4 million tourists who visit Australia each year deliver a combined $16bn to the economy.

“It's too early to give a definite view about the economic impact because we don't know how severe and how sustained the virus outbreak is,” he said.

Investment bank Citi warned that having initially underestimated the significance of the coronavirus, investors were struggling to catch up.

“While markets have been fast to price in a ‘China problem’, it would take only a small further increase in cases for this to morph into a ‘global problem’,” the investment bank told clients.

“What we find particularly troubling is the potential interaction between the shock from the virus, already stretched market valuations, and central banks approaching the local limits of their ability to prop up markets.

“While history suggests markets will eventually rebound quickly once the incidence of new cases subsides, the risk-reward seems to have deteriorated significantly in the meantime.”

CommSec senior economist Ryan Felsman warned the coming week would be “critical” for China, with the world watching to see if infections continued at their “explosive pace”.

“Markets will be in for a rocky ride this month,” he said.

“It's a fluid situation, but certainly China is looking to try and get on top of the outbreak. At least 14 Chinese provinces will remain shut down for a week to 10 days at this stage. Those provinces accounted for just shy of 70 per cent of China’s GDP in 2019, so that is going to have a significant impact on Chinese growth,” he said.

The repercussions of the shutdown would be felt in the commodity space, Mr Felsman said, with the iron ore price under pressure and both BHP and Rio Tinto tipped to tumble following their near-2 per cent share price declines in London on Friday.

“The biggest concern at the moment is on Chinese retail spending and how that flows through the world economy, and also, of course, demand for commodities,” he noted.

China is the world’s biggest consumer of raw materials. Analysts at Goldman Sachs estimate that the coronavirus has already slashed demand for industry metals by 200,000 tonnes and warn that could rise to 300,000 tonnes if it ends up having a similar effect on global growth as the SARS virus did in 2003. Infection numbers from coronavirus have already well exceeded that of SARS, though the death toll is lower.

As investors gauge the impact of the outbreak, the Reserve Bank will also be in focus this week, with a decision on the official cash rate expected on Tuesday. The market has all but eliminated any expectation of a cut, with futures markets tipping just a 12 per cent chance that rates are headed lower this month.

Experts expect the fall in the Australian dollar, which tumbled 4.3 per cent in January, as well as last month’s higher-than-expected inflation print, will see the RBA hold rates steady for another month.

Corporate profits will also be in focus this week, with Genworth, REA and Dexus among the companies kicking off earnings season.

Citi retail analyst Craig Woolford predicted retailers and building stocks were best placed to present strong results as successive RBA rate cuts trickled through to the economy.

“While the low-interest rate environment is likely to have quite tangible benefits for sectors that typically have high levels of debt such as infrastructure and property, we are already seeing turning points in other sectors where the interest rate has a flow-on effect in areas such as housing starts and retail spending,” he said.

But sluggish earnings-per-share growth was keeping a lid on expectations, CommSec’s Mr Felsman noted.

“We don’t have high expectations for the season, and … will see a very mixed reporting season.”