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The world grows increasingly fearful! (Friday, February 28, 2020)

Global share markets headed for the worst week since the darkest days of the financial crisis in 2008 as investors braced for the coronavirus to morph into a pandemic and derail world economic growth. Hopes that the epidemic that started in China would be over in a few months and economic activity would return to normal have been shattered, as new infections reported around the world now surpass those in China. The worsening global threat from the virus prompted investors to rapidly step up bets the US Federal Reserve would need to cut interest rates as soon as next month to support economic growth.

The spread of the virus in Europe and in the Middle East amid a surge in cases in Italy and Iran, coupled with the outbreak in South Korea, prompted investors to shun risk assets. South Korea on Friday reported more than 300 new cases of the virus, taking the total pass 2,000. There are more than 600 cases in Italy, while Iran has in excess of 200. The French president yesterday warned that an epidemic was coming, echoing similar remarks by Germany’s health minister. France and Germany have both reported about 40 cases.

MSCI all country world index fell 3.3% on Thursday to bring its losses so far this week to 8.9%, on course for its biggest weekly decline since a 9.8% plunge in November 2008. Wall Street shares led the rout as the S&P 500 fell 4.42%, its largest percentage drop since August 2011.It has lost 12% since hitting a record close on Feb. 19, marking its fastest correction ever in just six trading days while the Dow Jones Industrial Average fell 1,190.95 points, its biggest points drop ever.

In Asia, MSCI's regional index excluding Japan lost 0.6%. Japan's Nikkei gave up 2.5% on rising fears the Olympics planned in July-August may be called off due to the coronavirus. Australian shares dropped 3.0% to a six-month low while South Korean shares shed 1.4%.

The World Health Organization (WHO) said all countries need to prepare to combat the virus as the outbreak spread to major developed economies such as Germany and France.

Fears of a major economic slump sent oil prices to their lowest level in more than a year. U.S. crude futures fell to $46.28 per barrel. As investors flocked to the safety of high-grade bonds, U.S. bond yields have plunged, with the benchmark 10-year notes yield hitting a record low of 1.241%. It last stood at 1.274%.

That is well below the three-month bill yield of 1.439%, deepening the so-called inversion of the yield curve. Historically an inverted yield curve is one of the most reliable leading indicators of a U.S. recession. Expectations the Fed will cut interest rates to cushion the blow are rising in money markets, with Fed funds futures now pricing in a good chance of a move as early as next month. As investors rushed to safe assets, gold stood at $1,646.4 near seven-year high of $1,688.9 hit earlier this month.

In currency markets, the yen rose to a three-week high of 109.33 to the dollar and last stood at 109.47.The euro stood at $1.1005, having jumped over 1% in the previous session, the biggest gain in more than two years as investors wound back bets against the currency versus the dollar.