Asian equities are down sharply again, with the Hang Seng index losing 2.9%, and both the Nikkei 225 and the KOSPI currently down 1.7% on the day. While it appeared like the initial virus scare had faded, this risk-off sentiment was reinvigorated by news that the virus may spread unnoticed, and news that the WHO may reconsider declaring a global emergency as "progress of the virus in some countries, and especially human-to-human transmission" are worrying them.
US Treasury yields fell on the back of the risk-off sentiment and reassessment of the FOMC's likely next policy move. The 10y Treasury has dipped below 1.6%, dragging German Bund yields down alongside.
As we note in a report published just prior to this Daily, experience with virus outbreaks in the past shows that markets often bounce back quickly, but even if the virus outbreak turns out be comparable to SARS, its global economic effects are likely to be larger, as China has a much bigger share in the global economy nowadays. At this point, we don't expect any permanent damage of the epidemic to the Chinese economy or other regions across the globe, but in case of a further spread of the virus globally or in case of defaults among China's highly indebted non-financial corporates due to the containment measures, the risk of permanent damage increases significantly.
Barring such a scenario, the effects of the risk-off sentiment are probably temporary.
Yet, to the extent that the fall in yields wasn't driven by the coronavirus, but by a re-evaluation of the FOMC's future policy stance, this decline may be a bit more permanent.
The FOMC kept the target range for the federal funds rate unchanged at 1.50%-1.75%, but the Board of Governors, as expected, did make an upward technical adjustment of 5bp to the IOER and the ON RRP rate to force the effective federal funds rate closer to the midpoint of the current target range.