China stocks tumble on virus outbreak, but regional markets steady

Fears of contagion, particularly as millions travel for Lunar New Year festivities, has pushed stocks from record peaks

Asian stock markets bounced on Wednesday as China's response to a virus outbreak tempered fears of a global pandemic, although Shanghai shares slipped amid worries about a hit to domestic demand and tourism.

Fears of contagion, particularly as millions travel for Lunar New Year festivities, has pushed stocks from record peaks. The outbreak has revived memories of the Severe Acute Respiratory Syndrome (SARS) epidemic in 2002-03, a coronavirus outbreak that killed nearly 800 people and hurt world travel.

China puts measures in place to curb the spread of infection

Yet this time, China's response and candor - in contrast to the initial cover-up of the SARS outbreak - has tempered some of the gravest fears about the possible global fallout. China's National Health Commission said on Wednesday there were 440 cases of the new virus, with nine deaths so far. Measures are now in place to minimize public gatherings in the most-affected regions.

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The Shanghai Composite index .SSEC recovered from an early 1.4 percent drop to trade 0.5 percent lower by mid-morning. Markets elsewhere advanced, driving the MSCI index of Asia-Pacific shares outside Japan .MIAPJ0000PUS up 0.5 percent.

Japanese and Korean index rise

Japan's Nikkei .N225, Korea's Kospi index .KS11 and Hong Kong's Hang Seng .HSI all rose by more than half a percentage point after heavy drops on Tuesday. Australia's S&P/ASX 200 shrugged off worries to hit a fresh record high. "The call here is not that the virus is done or nipped in the bud by any means," said Kay Van-Petersen, global macro strategist at Saxo Capital Markets.

"But there have been no big further reported outbreaks, and the response from the Chinese authorities has been very, very positive...China is 1.4 billion people. This is not the first time they're tackling a bug that's gotten out of hand."

The outbreak, from its origin in Wuhan, China, has reached the United States, Thailand, South Korea, Japan, and Taiwan. Cases have been confirmed in 13 Chinese provinces. The World Health Organization (WHO) meets later on Wednesday to consider whether the outbreak is an international emergency.

SARS flashback

Airlines, other travel-exposed stocks and retailers vulnerable to shifts in consumer sentiment have borne the brunt of selling in the past two days along with the Chinese yuan. MSCI's airline industry index .dMIWO0AL00P posted its biggest daily drop in more than three months on Tuesday and shares in the industry were still falling on Wednesday.

On Wall Street overnight, the Dow Jones Industrial Average .DJI fell half a percent and the S&P 500 .SPX dropped almost a third of a percentage point, led by falls in airlines and China-exposed casino operators. "While details on the coronavirus are scant, we reckon that the SARS period could offer some clues as to how markets could pan out," said analysts at Singapore's DBS Bank. "The trends are clear: Yields and stock prices fell in the first few months of the SARS outbreak and rebounded thereafter."

US government bonds stabilise, Gold gives some gains

So far, the yield on US 10-year government bonds has stabilized after Tuesday's drop, sitting a little firmer at 1.7865 percent US10YT=RR. Spot gold XAU= also gave back some gains to hold 0.3 percent weaker at $1,553.01 per ounce.

In currencies, the safe-haven yen JPY= eased slightly from the one-week high it touched overnight, although the yuan nursed its losses. It was steady at 6.9026 per dollar CNY=. Oil prices also settled back as traders figured a well-supplied global market would be able to absorb disruptions that have cut Libya's crude production to a trickle. Brent LCOc1 futures settled down 20 cents at $64.59 a barrel. The US crude CLc1 fell 20 cents, or 0.3 percent, to $58.38 per barrel.