"We note that Australia's annual tourism export earnings to China amount to around $4 billion, based on 2018 data, or around 20 per cent of Australia’s total tourism exports," lead economist Andrew Boak said. That amounted to about 0.2 per cent of GDP in 2018.

Future Fund chairman Peter Costello said the coronavirus outbreak poses an immediate risk to investment returns, identifying its spread as a possible source of downward pressure on the $168 billion sovereign wealth fund's performance.

"In the short term there is obviously going to be an effect on tourism to Australia," said the former federal treasurer and current chairman of Nine, which owns The Australian Financial Review.

"That will affect airlines, it will affect airports, it will affect general consumption at a time when many in the tourism industry have also suffered the burden of bushfires.

"In the short term, yes, it will have an effect on the Australian economy. We don’t know how long it will go on. We hope measures taken now will contain the virus."

Markets go risk-off

The federal government is sending diplomatic staff to Wuhan as it prepares an evacuation plan for hundreds of Australians stranded in the locked-down city.


As governments introduce or widen travel bans to China – including the US State Department, which asked Americans to avoid non-essential travel – more than 4000 cases have been confirmed within China and more than 100 people have died.

The coronavirus, known as 2019-nCoV, is a respiratory illness that can cause pneumonia. It has been recorded in Australia, the US, and Canada, where person-to-person transmission was presumed by health officials on Monday.

Faced with uncertainty, investors were being proactively cautious but had many questions, said Kate Samranvedhya, deputy chief investment officer of Jamieson Coote Bonds.

"All markets tend to go risk-off to a certain degree on a global epidemic risk: lower commodity prices, lower stock prices, lower yields," she said.

"Markets tend to price in uncertainties until we know more information. Is this going to be as bad as the Spanish flu or can it be contained soon? What’s the infection rate, what’s the mortality rate, what’s the cure?"

Economic activity will decline temporarily on account of reduced travel, production and spending, Ms Samranvedhya said.

"But this should be short-lived, assuming the policy response can contain the severity," she said. "As infected case numbers peter out, economic activity goes back to normal."


Australian investors are not alone as they grapple with the spread of the coronavirus.

Wall Street dropped 1.6 per cent and Japan's Nikkei 225 Index 0.8 per cent. China and Hong Kong markets are closed for the Lunar New Year holiday, although Hong Kong will resume trading on Wednesday.

The selling spread to commodity markets and some currency markets. Crude oil fell for a sixth day to $US53 a barrel, down 0.3 per cent after Monday's near-2 per cent drop.

Iron ore futures traded in Singapore wiped out two months' worth of gains, falling 0.3 per cent to $US84.88 after Monday's 6 per cent drop. Pricing for iron ore traded in China is not available until markets return from the Lunar New Year break.

The Australian dollar moved off a three-month low of US67.53¢ hit earlier in the session to trade at US67.61¢.

In rates markets, the yield on 10-year US Treasuries fell 5 basis points to 1.6 per cent, while Australian bonds fell 13 basis points to 0.951 per cent.

The grip of coronavirus also extends to rates futures markets, where the probability of an interest rate cut at the Reserve Bank's February meeting increased to 29 per cent on Tuesday from 15.1 per cent on Friday.


Rates in focus

US traders are also leaning towards a rate cut, pricing in as much as a 29 per cent chance of a reduction at the September FOMC meeting. The FOMC meets this week, when no change to rates is expected.

The S & P/ASX 200 fell 1.77 per cent on December 31 but had advanced more than 6 per cent in 2020 until Tuesday's drop.

Investment manager Tribeca Global Resources said some economists are predicting the virus could knock as much as 1 percentage point off 2020 Chinese GDP. "However given the situation is changing day by day, it is hard to put too much confidence in these types of forecasts," it concluded.

Although the impact of the 2003 SARS outbreak was largely benign for commodities, the investment manager was not inclined to rely on the same outcome from the coronavirus. "With broader markets trading at all-time highs, the risk-off sentiment is likely to persist until the rate of confirmed cases starts to decline."

South Korea's finance minister, Hong Nam-ki, said he was prepared to enact measures to counteract the cost of the coronavirus on the economy. South Korea has four confirmed cases of the virus and its biggest trading partner is China.

"We are closely examining the impact of the spread [of the virus] in China on its consumption and production, along with the global economy and our exports," Mr Hong said in Seoul, according to a Yonhap report.

"For now, it has had a limited impact on South Korea's domestic consumption and economic activities, but we will still need to closely monitor the issue."

OPEC members are considering deeper cuts to production to minimise the effect on the oil price from the coronavirus, according to a report by Platts. This followed similar comments on Monday by Saudi Arabia's Oil Minister, Prince Abdulaziz bin Salman, who said the kingdom could "support oil market stability, if the situation so requires".