January 28, 2020 / 8:34 AM / in a month

European yields stabilise as investors assess coronavirus impact on markets

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Olga Cotaga

LONDON, Jan 28 (Reuters) - Yields across euro zone bond markets stabilised on Tuesday as investors calculated the impact the coronavirus in China could have on global financial markets as many questions remain unanswered, including how fast it could be contained.

More than 100 people have died from the virus and more than 2,800 been infected as it spread further into Europe, with Germany declaring its first confirmed case.

But Deutsche Bank strategist Jim Reid said the death rate of the flu-like virus is much lower than that of the SARS virus in 2003 and just “a fraction of the hundreds of thousands of people who die each year globally from seasonal flu”.

Still, “by far the biggest issue in this episode is the long contagious period where there are no symptoms which makes the virus much harder to isolate and different from SARS,” Reid said.

Moreover, as major companies report potential business disruptions and governments advise against unnecessary travel to and within China, analysts are trying to compute how much the disruption could damage growth.

Apple Inc’s plan to ramp up iPhone production by 10% in the first half of this year may hit a roadblock as the coronavirus outbreak spreads across China, the Nikkei Asian Review reported on Tuesday.

“The market will continue to watch the number of how many people become infected,” said Christian Lenk, rates strategist at DZ Bank.

“But the interesting part will be how much the virus and the contamination efforts of the Chinese government will finally lead to hamper supply chains and growth and that is really hard to grasp in the short term,” said Lenk, adding that “if numbers don’t increase exponentially there’s a chance that markets will return to wait-and-see mode.”

Some investors have dipped their toes in guessing that inflation in the euro area will be weaker, with market gauges of long-term inflation expectations falling to their lowest in 1-1/2-months at 1.2640%.

The yield on the benchmark German Bund was flat at -0.385% , though not far from the three-month low -0.391% it fell to on Monday.

Yields across other European markets, including Italy and Spain, were also stable.

Apart from the spread of coronavirus, traders will also be watching the Federal Reserve meeting which starts on Tuesday. The market consensus is that the central bank will keep interest rates unchanged at between 1.5% and 1.75%. (Reporting by Olga Cotaga; Editing by Angus MacSwan)

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