The reaction to the Wuhan coronavirus by the mainstream media and the market and the mixed statements by the World Health Organization are not diminishing fears that we could be in the beginning stages of a global pandemic. Health authorities are urging everyone to take extra precautions and to not lose sleep at night. Others think that the situation is a lot worse than what is being reported. Who is right? Until that question is answered, perhaps it is time to seek underground shelter, put on the black plague doctor mask, refrain from eating bat soup, and keep an eye on equities.
Big Trouble in Little China
All eyes have been on the ocean of red ink drowning global financial markets. It has been volatile for investors wondering if they should buy the dip or sell on fears of prolonged agony. Either way, tens of billions of dollars will be lost and gained until the coronavirus subsides. When the outbreak finally winds down is anybody’s guess at this point.
China returned from its extended Lunar New Year holiday to steep losses. The Shanghai Composite, the nation’s primary share benchmark, crashed close to 8%. The Shenzhen Composite, a smaller-cap stock index, cratered nearly 9%. The Chinese yuan plunged against most of its major currency rivals; the USD/CNY slipped below the crucial seven threshold as forex traders bet against the yuan during these trying times.
The declines were mostly expected since traders were playing a game of catch-up after the long holiday.
It was mixed in other regional markets. The Japanese Nikkei slipped 1%, the Hang Sang Index added 0.2%, Korea’s Kospi was relatively flat, Australia’s ASX 2000 slumped 1.3%, and the MOEX Russian Index dipped 0.2%.
Analysts believe that the central bank could stop the economic bleeding. The People’s Bank of China (PBoC) recently announced that it would inject $174 billion into the economy to support financial markets, up from $100 billion more than the same time a year ago. It will inject this liquidity into reverse repo operations, which will see about $150 billion in maturities this week. Overall, Beijing will introduce 30 extra stimulus measures to fend off the bears.
Central bank heads are also requesting financial institutions to increase their lending, avoid calling in debts from customers in areas that are substantially affected by the coronavirus, and maintain quarantine regulations.
Despite projections that the world’s second-largest economy will witness growth slump to 5% in the first quarter, the China Securities Regulatory Commission anticipates the outbreak will have only a short-term impact on equities. The securities watchdog might be confident in this prognostication because it revealed that it is thinking about instituting a hedging instrument and potentially suspending evening futures trading. It may not be enough to prevent the loss of 2.3 million jobs, though.
How the World Is Reacting
U.S. financial markets recently took a beating after they suffered their worst day since August. However, upon their return from the weekend, they quickly rebounded and took back roughly half of the 600-point rout. The Dow Jones Industrial Average and the Nasdaq recorded triple-digit gains, and the S&P 500 edged up about 1%. They did pare their gains on weakness in airline and travel stocks.
Europe woke up from the Brexit Day weekend bash to a sea of green. The London FTSE and the German Dax each picked up 0.5%, and France’s CAC rose 0.45%. In the Great White North, the Toronto Stock Exchange advanced 0.5% to 17,407.
Central banks do not see any imminent economic danger from the coronavirus. The Federal Reserve left interest rates unchanged in the range of 1.50% and 1.75%. The U.S. central bank may not accommodate right now, but Fed Chair Jerome Powell expressed some consternation about Asian influenza. The global outbreak is not enough for Powell to pull the trigger on a rate cut; the Fed did slightly lift the rate it pays banks for excess reserves kept at the central bank from 1.55% to 1.6%.
“It’s a serious issue. There is likely to be some disruption of activity in China and probably globally. We’ll just have to wait to see what the effect is globally,” he told reporters.
Can the world expect central banks to mirror the Fed’s wait-and-see approach? Or will these institutions spring into action and adopt actions comparable to the PBoC? The UBS says the economic fallout from the coronavirus, which many say will slow down global growth, will not force the central banks to react.
The Bank of England (BoE) avoided a rate cut. The Reserve Bank of Australia is widely anticipated to keep rates steady at its February policy meeting this week. Ditto for the Reserve Bank of New Zealand, the Bank of Mexico, and the Swedish Riksbank.
But while the central banks are sitting on their hands, the private market is acting. Many of the major airlines have suspended flights to and from China until at least the middle of the month. Major tech companies are temporarily shutting down operations in China or restricting travel, including Apple, Tesla, Microsoft, Google, and Amazon. Disney has closed its Shanghai resort and Hong Kong theme park, and cruise ships are being prevented from docking. Of the fast-food titans, McDonald’s, Starbucks, and Coca-Cola have closed locations and factories. Saudi Arabia is weighing short-term production cuts in reaction to demand concerns.
All are responding to the situation in their own way.
Off to the Bunker With a Corona
Once the Wuhan coronavirus subsides, it could take as long as 19 months for multiple industries to recover. It is estimated that the global economy will take a hit of at least $40 billion to $60 billion. These losses will not be a result of the virus but rather the panic and fear. What is interesting is our irrational behavior. The common flu kills thousands of Americans every year, but we are not losing our minds, hitting the sell button on our stocks or stocking up on face masks, biohazardous suits, and Lysol wipes. Well, off to the bunker.
Read more from Andrew Moran.