Risk-off atmosphere deepens as virus spreads

Heading into the close, the FTSE 100 is down 120 points, while US markets post renewed losses after a morning bounce for futures.

The morning bounce in European markets and US futures is a distant memory, as indices push to new lows thanks to the ongoing spread of the coronavirus. After such a big move yesterday, volatility is not going to disappear immediately, and we should expect things to take a while to settle down. October’s selloff happened over several days, and v-bottoms are a rarity, and it does not feel like we have hit a sufficiently high level of panic yet. The spread of the virus to Europe was always likely to be viewed as a much more worrying event than the broader outbreak in China, since the kind of draconian measures available to the Communist Party will be all but impossible to implement in the EU.  However, given adequate containment efforts the West’s high standard of medical care will act as a powerful firebreak to any outbreaks.

As always, price is the main determinant of sentiment and the key tell for what happens next. The inability to hold the overnight bounce signals that the dip buyers’ moment has not arrived, yet. Despite this, the base case should still be that the market will recover in due course, previous instances of severe one-day drops in equities and spikes in the Vix tending to produce very favourable outlooks for stocks.