How bad could the coronavirus outbreak be for the global economy? It is a question that businesses, consumers, traders, investors and policymakers are struggling to answer definitively, and nowhere is that reflected more starkly than in the behaviour of markets this week.
In the absence of hard answers, uncertainty rules. And when uncertainty has the upper hand, it wreaks havoc on investors’ psychology. They dump stocks and seek shelter in assets that are considered safer bets, like United States government bonds that are backed by the full faith and guarantee of Uncle Sam. Or that perennial port in a financial storm: gold.
Even if you are not invested in stocks, bonds or humanity’s favourite metal, the performance of these assets still affects you. It is a global economy, people, and we’re all in it together.
On Friday, Wall Street once again found itself gripped by uncertainty. Despite a blockbuster US jobs report, the Dow Jones Industrial Average opened down 750 points and fell as low as 894 points during the trading day, only to pair back a fair chunk of those losses to finish the session down 256.50 points, or 0.9 percent.
The broader S&P 500 Index closed down 1.7 percent. The index is seen as a proxy for US retirement accounts and college savings plans. As it loses value, think of the kid who worked his or her tail off to get into a top-tier university, only to have to pass on the offer for lack of funds.
On the flip side, US treasury yields – which move in the opposite direction of prices – continue to sink to record lows.
The 10-year US treasury yield – which on Friday tumbled below 0.7 percent for the first time ever – is a benchmark for setting rates on financial products such as home mortgages and student loans. Lower monthly payments on adjustable-rate products are likely in the offing.
But that could be cold comfort should the broader US and global economies falter. Things can get ugly fast. The “R” word – recession – is peppering more analysts’ notes as they issue warnings and revise outlooks as coronavirus cases multiply outside of China.
On Monday, the Organisation for Economic Co-operation and Development (OECD) warned that global economic growth could fall below zero in the first three months of this year. The OECD’s worst-case scenario sees global growth as low as 1.5 percent this year, with several economies being pushed into recession, including Japan and the eurozone.
This week has seen some wicked gyrations in stock markets as investors grasp at straws of optimism. Joe Biden’s victory in the Super Tuesday Democratic primaries led investors to snap up stocks on the belief that a more market-friendly presidential contender is poised to overtake Bernie Sanders for the nomination. But the Biden bounce only lasted a day.
Even an emergency interest rate cut by the Federal Reserve on Tuesday could not ease the coronavirus fears for long. Wall Street’s favourite drug since the 2008 financial crisis is cheap money. When lower borrowing costs fail to keep the darkness out, you know fear is winning.
Fear’s foothold is rooted in how coronavirus-related disruptions ripple through the ecosystem that is our global economy.
As the virus has spread across the world, the number of confirmed cases has surpassed 100,000 by some measures, while more than 3,400 people have died from COVID-19, with the vast majority of deaths in China.
The outbreak started late last year in China – the world’s second-largest economy, accounting for some 20 percent of global output. As business as usual there ground to halt, factories fell idle – throwing a wrench into supply chains that feed manufacturing outside of China’s borders, and lessening demand for raw materials that China imports to feed its production.
Take oil, for instance. China is the world’s biggest importer of crude. Saudi Arabia-led OPEC has been agitating for weeks for a big, bold output cut not seen since the 2008 financial crisis to counter the drop-off in Chinese demand and beyond. But the cartel has failed to convince its biggest ally – Russia – to get on board with that strategy. Saudi Arabia needs oil to fetch $83 a barrel to balance its state budget. Russia needs about $42 a barrel. Global benchmark Brent crude fell below $46 a barrel on Friday.
The number of firms issuing profit warnings to manage investor expectations of the potential blow that awaits the bottom line continues to grow.
Trade shows, conferences and sporting events have been cancelled. The handshake – believed to have started as a literal gesture of good faith to show each party is not carrying a weapon – has fallen out of favour. At this week’s OPEC meeting in Vienna, cartel energy ministers opted for a foot shake instead.
Even the release of the latest installment in the James Bond spy thriller film franchise has been postponed from April until November, shaking – not stirring – cinema and restaurant stocks.
More businesses are asking their labour force to work remotely to lower the risks of contagion disrupting operations. In Europe, financial regulators are concerned that a sudden absence of key trading staff could cause markets to seize up.
But not everyone can work from home or take paid leave. Low-wage workers could experience severe financial hardships as coronavirus spreads – especially in the US, where there are serious gaps in the social safety net.
If profits take too big of a hit, firms could start cutting back production and laying off workers. That in turn could roil consumer confidence, causing people to squirrel away their money rather than spend it.
In the US, where consumer spending accounts for roughly two-thirds of economic activity, that could trigger a self-reinforcing cycle in which consumers rein in spending and firms rein in production.
Data is already capturing the slowdown in China. More will roll in from around the world. Much of it will reflect what has passed already. But until the future becomes clearer, expect more warnings, more revisions to forecasts, and more volatility.