An outbreak of coronavirus in Wuhan, the capital of China's Hubei province, has dominated headlines. Currently, the Public Health Agency of Canada, the WHO, and the CDC are advising travellers to exercise enhanced caution while travelling to or from China. A global alert has not yet been issued.

Below, we go through what we know about the outbreak, how previous outbreaks have affected global markets, and the effect we're seeing now.

Coronavirus Situation Reports

The WHO issues daily situation reports that are perhaps the best source for measured, knowledgeable updates about the outbreak. The system of incentives in place for news media does not encourage responsible reporting around public health issues, and it's perhaps best to get information from the relevant authorities.

Here's the headlines from Sunday's situation report:

• A total of 2,014 confirmed cases of novel coronavirus have been reported globally, 1,985 of which were reported from China

• Fifty-six deaths have been reported

• There are two confirmed cases in the United States

How SARS Affected the Market

It's difficult to project how news will affect global markets, but in this case we have very relevant experience to draw on. The 2003 outbreak of SARS, itself caused by a coronavirus, originated in China's Guangdong province and spread around the world. In total, 8,098 cases of SARS were reported in 17 countries, resulting in 774 deaths.

The outbreak dominated headlines for weeks and significantly affected both domestic and international travel. The effect on global markets was interesting, and serves as a useful example for us today.

Most notably, the SARS outbreak had a significant effect on global oil markets, shown below in the chart of WTI and Brent prices:

The effect on the oil market is obvious. The price of WTI went down 32% in just 54 days, and would not fully recover until March of 2004. The catalyst for this loss is thought to be the decrease in travel and confidence caused by the outbreak. 

The effect of the outbreak was less obvious in other markets. Here's how the price of gold (US dollar/oz) evolved in 2003:

It's hard to see as obvious a shift as we saw in the oil markets. The price of gold trended down for the few weeks following the WHO announcement, which is perhaps not what you'd expect from a global panic. 

For the S&P/TSX Index, let's play a game of "Pin the Global Outbreak Panic on the Market." When do you think the WHO issued a global alert?

If you picked "near the yearly low," you'd be right! The S&P/TSX index returned over 31% from the WHO global alert to the end of the year:

To be clear: We don't believe that the SARS outbreak acted as a catalyst for a S&P/TSX rally. Rather, we read these charts to mean that the outbreak had little effect on global markets, other than the market for crude oil.

How Coronavirus is Affecting the Market

The biggest effect we've seen so far is on the oil market. The price of WTI has fallen somewhat precipitously since the WHO held an emergency meeting to discuss the outbreak, as we can see below:

As with the SARS outbreak, we haven't yet seen as dramatic a pullback S&P/TSX index:

In Conclusion

Our team will continue to monitor the coronavirus outbreak and its potential to drag on the global economy. However, we believe that (at this juncture) panic is unjustified. Direct exposure to crude oil prices has proven painful, but that pain appears to be localized.

Our best advice at this time is to avoid travelling to Wuhan, practice normal precautions, and contact us if you'd like to talk about your portfolio's exposure to this outbreak.

Disclaimer: Canaccord Genuity Corp. is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and Canadian Investor Protection Fund (CIPF). The comments and opinions expressed in this commentary are solely the work of the Cash Management Group and Andrew Johns.

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