Over the weekend, the coronavirus outbreak has moved right back into the forefront of investor focus.
Risk markets have been heavily lower at the start of the week on the back of reports that new cases of the virus outside of China have spiked in recent days.
New Cases Rising in Italy
In Europe, Italy has reported over 150 new cases of the virus, making it the worst hit in the eurozone. So far, the death toll sits at 6.
This latest increase in cases comes only a few days after China reported that new cases of the virus there were actually slowing down. These new cases, therefore, are now sparking fears of a further outbreak.
The regions seeing the most cases so far are Lombardy and Veneto. Italian authorities are already taking measures to help stem the spread of the disease with some small towns placed on lockdown. Even the famous Veneto Carnival has been canceled.
Italy At Risk of Recession
The market is closely watching Italy given the fragile economic condition of the country. The situation is also very important to the EU as a whole.
Italy accounts for around 15% of EU GDP, making it the third-largest economy. The two most affected regions in Italy, Lombardy and Veneto, account for around 31% of Italian GDP.
Consequently, even a 1% negative move in GDP in these regions could be enough to push Italy into a technical recession. Italian GDP contracted 0.3% in 4Q 2019 and a similar negative reading for Q1 2020 would confirm a technical recession there.
A further drop in Italian GDP would also cause a drag on the eurozone GDP as a whole.
Italian Data on Watch
Incoming Italian data will now take on new importance as traders look to gauge the impact of the coronavirus outbreak there.
Italian sentiment data out this week will give the first glimpse into the mood of the business environment. Meanwhile, February PMI data sets due over the following week will give a first look at the impact on factory activity there.
However, given the timeline in question, it will most likely be the March PMIs that will properly reflect the impact.
Issue for the ECB
If data sets do start to turn lower, the issue is likely to warrant attention from the ECB. This is particularly true if eurozone growth is negatively impacted.
However, the ECB is likely to push back against calls for further easing in the short term. It will most likely wait to see if the impact drags on through the 2Q before acting.
Nevertheless, there are clear downside risks and the potential for further ECB easing has once again increased.
The turn lower in general risk sentiment has weighed heavily on asset prices around the globe. In Europe, the DAX has come under heavy selling pressure with price breaking down through the rising trend line from last summer’s lows.
Price is now quickly approaching the 12882.6 support which has been a key demand zone over the last few months. If price breaks below here this will be a very bearish development, putting focus on a test of the 12658.2 level next, ahead of the lower 12492.2 level.