Chinese Virus Could Be a ‘Black Swan Like No Other’: Moody’s

Coronavirus may end up being “a black swan like no other,” warns Moody’s Analytics, as deaths from the epidemic mounted to 212 in China, where it originated. And the disease’s market impact may already have begun.

The black swan reference, of course, was to a now-standard metaphor for surprise catastrophes, coined by scholar Nassim Nicholas Taleb. In the world of finance, the term is most often associated with the 2008 financial crisis, which few saw coming. Swans are white, so a black one is very rare.

“Unlike the U.S. home mortgage meltdown, no one predicted the early 2020 arrival of a potentially devastating pandemic,” wrote John Lonski, chief economist at Moody’s Capital Markets Research. “And unlike the financial crisis, public-health and economic policymakers may be limited regarding their ability to remedy or offset a 1918 (or Spanish flu) type pandemic.”

The Spanish flu sickened 500 million worldwide and killed an estimated 50 million, which was 3% of the earth’s population at the time.

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The market consequences of the current contagion are already showing up in the industrial metals, of which China is a huge customer, Lonski pointed out. The prices for the likes of copper, zinc, and nickel have dropped a collective 7.1% since the virus came to public notice on Jan. 17.

Another early result of the virus scare is a rush into the perceived safety of bonds, Lonski indicated, pushing up their prices. The 10-year Treasury’s yield sank to 1.54% from a recent 1.84%, while Baa corporate bonds (the lowest level of investment grade) slid to 2.89% from 3.05%. Bond prices and yields move in opposite directions.

High-yield bonds, on the other hand, are the lone part of the credit market that has suffered price decreases, according to Lonski. If a pandemic triggered an economic slump, the reasoning goes, defaults would rise among junk. A high-yield composite index showed that these bonds’ yields jumped to 5.79% on Monday, from 5.26% last Friday. The yield since has eased back to 5.58%.

The junk default rate currently has seen a small escalation, to 4.84% from 4.4%.

How the course of the pathogen could affect the US is unclear. A woman in Chicago, who had been diagnosed last week with the coronavirus, infected her husband, the Centers for Disease Control and Prevention said Thursday. That was the first American case of human-to-human transmission. The agency contended that the virus is not spreading widely and that the risk to the US public remains low.

Meanwhile, the World Health Organization called the coronavirus outbreak a public health emergency of international concern.