The Dow, S&P 500 and Nasdaq are in steep decline as the deadly outbreak expands in South Korea, Italy, and Iran.
Factories around the world are grappling with parts shortages as their Chinese suppliers struggle to resume normal operations. As global economic engines sputter, the Federal Reserve and other central banks are facing calls for emergency help.
But central bank chiefs may be ill-equipped to battle the economic consequences of the flu-like illness. Interest rates are already in negative territory in Europe and near historic lows in the United States. And making credit less expensive — the Fed’s standard tool for combating a slump — may offset some of the financial upheaval, but will do little to remedy broken supply chains or ease worker and consumer fears of contagion.
“There’s just growing angst in the investor community that this thing is more serious than we realized,” said Chris Meekins, an analyst with Raymond James and former Trump administration preparedness official. “When you’re worried about catching a disease, you’re not going to go out to dinner; you’re not going to go to the movies or sporting events or concerts. The only question is how widespread this becomes.”
After weeks of playing down the likely impact outside China, investors on Monday rushed into traditional safe havens, sending the price of gold soaring as government bond yields, which move opposite prices, plumbed new depths. Oil also fell into bear market territory amid expectations of prolonged global weakness.
“It may not be an actual pandemic yet, but it’s an economic pandemic,” said Diane Swonk, chief economist for Grant Thornton. “It’s global in scope and disrupting activity around the world.”
Monday’s markets action showed the rapid evolution of the coronavirus from a limited threat to supply chains into an across-the-board tightening of financial conditions, said Gregory Daco, chief U.S. economist for Oxford Economics. A spike in volatility may prompt businesses to hit the pause button on planned investments. And as nervous global investors sought safety in U.S. assets, they pushed up the value of the U.S. dollar.
That will make imported goods for American consumers less expensive, chilling inflation and leaving the Fed farther from hitting its goal of 2 percent annual price increases, which the central bank sees as a sign of a healthy economy. As a result, some investors now expect the Fed to cut rates to counteract some of the economic weakness.
“The Fed can’t eliminate all the risks on its own,” said Daco. “What the Fed can do it prevent a worsening of the situation.”
Workers spray disinfectant at the National Assembly in Seoul after it was discovered that a person who took part in a discussion session on 19 February at the Assembly has tested positive for the novel coronavirus. Parliament said that disinfection will be carried out in stages until 26 February. (Yonhap/EPA-EFE/REX/Shutterstock)
Gold, a safe haven in times of turmoil, climbed 1.6 percent to $1,675 an ounce. Brent crude, the global benchmark, skidded 5.4 percent on worries the outbreak will subdue demand for months to come. China is the world’s largest energy consumer, but it has been buying less crude amid virus-related travel restrictions. Meanwhile, major oil producers have yet to reach a deal on emergency measures to scale back output. The drop in oil prices will ramp up pressure on OPEC — the Organization of the Petroleum Exporting Countries — and Russia to reduce oil supplies at an upcoming meeting in March.
U.S. stock markets ended last week in decline, with the tech-heavy Nasdaq shedding 1.79 percent on Friday. Technology stocks like Apple, Amazon and Google parent Alphabet were hit particularly hard. Meanwhile, the yield on the 30-year Treasury fell to an all-time low, suggesting investor confidence in the economy was on shaky ground.
Michael Farr, president of Farr, Miller & Washington, said that the Federal Reserve’s ability to tackle the economic turmoil “is very limited.” A reduction in U.S. rates won’t address the supply problem coming out of Asia, Farr said, or reopen shuttered schools and factories.
“The risk isn’t so much morbidity and mortality, but it is the risk of business slowdown and perhaps even recession, Farr said.
Still, some say it was only a matter of time before global markets reacted sharply, and all at once, to the outbreak.
“The bond market had been signaling danger while the stock market has been blithely climbing the wall of worry,” said Nancy Tengler, chief investment officer of Laffer Tengler Investments. “We expected a much stronger correction on the initial coronavirus news — stocks are due for a pullback, after all. If we get a proper correction as the virus spreads, we think this will be constructive for stocks in the long-run.”
The White House is preparing to request an emergency spending package from Congress to finance its response to the novel coronavirus outbreak and look for ways to mitigate its effect on manufacturing supply chains. The request could be sent in the next few days and could seek nearly $1 billion in funds, according to two of the people briefed on the planning.
From the White House and the campaign trail, President Trump often touts the economy’s strength, and he routinely points to the stock market as one of his administration’s top accolades. U.S. stocks have reached record highs, even in the face of ongoing trade uncertainty. Yet there are still worries that in the event of another downturn, the government and central bank won’t have as much leeway to boost the economy.
U.S. stocks have reached record highs despite ongoing trade uncertainty and other destabilizing like the coronavirus.
In a CNBC International interview that aired Monday, Treasury Secretary Steven T. Mnuchin said it would be difficult to “have strong predictions on the economic issues without being able to predict the health outcome.”
“I think we need another three or four weeks to see how the virus reacts until we really have good statistical data,” Mnuchin said.
On Monday, Chinese leaders postponed the National People’s Congress — the most prominent event on their political calendar — set for March 5. Beijing also reversed course after saying it would relax travel restrictions on the outbreak’s hotbed of Wuhan.
The Chinese government reported 409 new coronavirus cases and another 150 deaths by the end of Sunday. There are now more than 77,000 confirmed cases, with a cumulative death toll of more than 2,500.
Over the weekend, South Korea, Italy, and Iran reported sharp increases in cases. Italy now has the largest known outbreak outside of Asia, with more than 200 confirmed cases and five deaths as of Monday. Officials there aren’t even sure how the virus arrived in the country. South Korea’s caseload climbed to 833. And a spokesman for Iran’s health ministry said that the death toll from the new coronavirus has risen to 12.
“Whatever optimism in the markets recently about the coronavirus resolving quickly has evaporated with the spread to South Korea and other countries,” said John Kilduff of Again Capital. “Demand for commodities of all stripes has cratered in China and aviation traffic is plummeting as well.”
Early on, analysts had hoped that any economic fallout from the coronavirus would be contained to China, based on what happened in the wake of the 2002-2003 SARS outbreak. But today’s China is much more interconnected with the rest of the world, with supply chains on nearly every continent reliant on Chinese manufacturing and labor.
What you need to know about coronavirus
The latest: With more than 200 confirmed cases and five deaths, Italy now has the largest known outbreak outside Asia, pushing the world closer to a pandemic.
What is coronavirus, and how does it spread? Coronaviruses are a large family of viruses whose effects range from causing the common cold to triggering much more serious diseases, such as severe acute respiratory syndrome, or SARS. Here’s how epidemics such as that involving covid-19 end (and how to end them faster).
Mapping the spread of the new coronavirus: More than 25 countries have reported at least one case of coronavirus. Infections have been confirmed in France, India, Hong Kong, Japan, Nepal, Spain, Cambodia, Belgium, Singapore, Sweden, Egypt, the United Arab Emirates, Italy, Vietnam, Taiwan, Canada, and Sri Lanka.
How does the coronavirus make people sick, and why does it kill some of them? When people die of the coronavirus, it’s not just the virus that kills them — it’s their own immune system. These are the biggest questions surrounding the virus.
Source: https://www.washingtonpost.com/business/2020/02/24/stocks-dow-nasdaq-coronavirus/
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