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Coronavirus Might Just Turn Into A Quantitative Tightening Event

Nelson Alves profile picture
Nelson Alves


  • A couple of weeks ago, I proposed that the virus would make an impact on the economy, and, by default, on the complacent market.
  • Now, it seems like the virus is spreading out of China, and the biggest world economies are activating the debate around stimulus.
  • Big organizations will likely get access to the stimulus, but it is critical to understand how smaller companies will cope with this crisis.

A few weeks ago, I wrote about the coronavirus threat to the world economy and the markets. In that text, I said that the economic impact of the current virus would be higher than the SARS iteration. Now, I'm no virus expert. However, even in the early days, it was clear to me that the virus was much more contagious than the SARS, which, given the higher interconnectedness between China and the rest of the world, meant that the spread could get scary.

After the initial outbreak, China provided a strong and determined response. The country acted swiftly and decisively to contain the virus, even at the expense of air travel, tourism, and industrial production. In my non-expert opinion, that's the price to pay to try to control the virus threat.

However, parallel to that, there is a huge side effect on the financial sector. Finance runs on time. For instance, interests are due periodically, we use day count conventions to be precise on the interest expense, bills are due in X number of days, and investors expect periodical reports from publicly traded companies, among others. The problem here is that the measures to control the virus are making the world economy to slow down, while its financial mirror has no inherent mechanism to reflect that.

All that seems like a dangerous setup, which might be the catalyst for financial panic. Companies, like Apple (AAPL), are already feeling the impact of lower demand and lower production output. Now, you might argue that Apple is more than capable of withstanding the shock, and you're probably right. On that line of thought, a stimulus is also on the way for big financial companies. We should be fine, right? Not so fast. I am focusing on the impact on small-and-medium

This article was written by

Nelson Alves profile picture
My specialty lies within the complex and intriguing realm of macroeconomics and growth-oriented investing. The approach I employ is fundamentally a top-down analysis, initiating from a broad examination of sectors and economies, subsequently drilling into the intricate details to identify optimal investment opportunities. My professional experience has been predominantly carved on the rigorous and demanding trading desks, an environment that honed my analytical skills and fortified my understanding of financial markets. Nevertheless, I must emphasize that my reflections and observations herein are purely my own, and should not be construed as formal financial advice. I ardently believe in the intellectual necessity of individual research and due diligence. I bid you successful investing.

Analyst’s Disclosure: I am/we are long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

This text expresses the views of the author as of the date indicated and such views are subject to change without notice. The author has no duty or obligation to update the information contained herein. Further, wherever there is the potential for profit there is also the possibility of loss. Additionally, the present article is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Some information and data contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. The author trusts that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.

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