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And it’s a fair bet that if and when the World Health Organisation declares that the coronavirus has been contained the response will be equally extreme to the falls seen over the past couple of weeks.

The world’s economic sensitivity to China is way more profound than it was in 2003 when the SARS pandemic hit.

Donald Trump’s trade war was a classic example of this dynamic in action. Despite the fact that 2019 was ultimately a good year for sharemarkets it was also a year marked by investors attempting to second guess the policy of the US president based on his Twitter utterances.

The ink was barely dry on  Phase One of the trade deal between the US and China on January 15, when coronavirus started to loom large.

Hopes of a post trade war glow have been short lived, giving way to coronavirus information contamination.

Rather than receiving informed scientific data about what is being done to combat the virus, (find a cure or a vaccine) we are fed with a live update on new cases, additional countries affected and death rates from both news organizations and a stream of (sometimes) misinformation on social media.

With this fear grows.

Add to that the decision by our government and others to all but block the entry of foreign arrivals from China and Qantas’ (and other airlines) move to temporarily pull out of flying to China and it is easy to understand why people are panicking.

In fairness to Australians the coronavirus shock has come on the back of one of the worst bushfire seasons on record – the cost of which will become clearer over the next few months.

We also live in a country in which the economy is closely tied to China – our largest trading partner.

Markets hard-wired to be scared.

Markets hard-wired to be scared.Credit:Getty Images

Even the move by Chinese authorities to prime the liquidity pump to mitigate economic shocks and stockmarket crashes waS more worrying than reassuring.

China has plenty of form when it comes to stimulating its economy by flooding the financial system with liquidity. This time around China’s central bank will inject $US174 billion into financial markets. There will probably be more to come.

The Chinese government has also previously imposed restrictions on the operations of its share market to avoid wild negative swings. It did so in 2015 when large shareholders were prohibited from selling stock for six months. This time around it has placed a temporary ban on short selling.

Despite these measures the Shanghai composite index fell 8.2 per cent by lunchtime Friday

The remainder of the equity markets around the world just have to hold on for the ride.


And as economists and experts continue to remind us, the world’s economic sensitivity to China is way more profound than it was in 2003 when the SARS pandemic hit.

And there has been a steady stream of economists downwardly revising China’s GDP in for the first quarter.

In Australia we are on the cusp of our earnings season – a point at which we will have far greater visibility into how companies fared over the December half and their prospects for the remainder of the year.

If one takes financial stocks out of the equation earnings from industrials are forecast to be up around 5.3 per cent according to consensus.

This represents a fair improvement in earnings growth in 2019. Having said that stock valuations remain fairly high so there is potential for reasonable downside if earnings don’t hit that mark.

But  it is fear rather than fundamentals that led the ASX200 to plunge 2 per cent on Monday’s opening, before some bargain hunting stemmed the decline to 1.2 per cent for the session.

Elizabeth Knight comments on companies, markets and the economy.

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