The COVID-19 coronavirus crisis

Economic and financial perspectives

• Just over a month ago, on February 10, we wrote our first report on the COVID-19 coronavirus outbreak. At that time it was known as the Novel (new) Coronavirus pneumonia (NCP). We updated the situation on February 28 and we now provided a further update on the current situation with the crisis.
• This morning there was co-ordinated global action by central banks to cut rates and boost liquidity.

The coronavirus outbreak has affected global economic activity especially travel, leisure, mining and energy sectors.

The crisis widens

• Just over a month ago, on February 10, we wrote our first report on the COVID-19 coronavirus outbreak. At that time it was known as the Novel (new) Coronavirus pneumonia (NCP). And at that time we noted “Since the world was alerted to the outbreak in mid-January, metal and energy prices have fallen 10-15 per cent but global sharemarkets remain supported.”
• In fact the US Dow Jones hit record highs on February 12. The S&P 500 index and NASDAQ hit record highs on February 19. The Australian sharemarket hit record highs on February 20 with the ASX 200 at 7162.5 with the All Ordinaries at 7255.2.
• Clearly global investors under-estimated the situation. The Australian sharemarket fell for the next six sessions after the peak, losing 11.3 per cent. In the three weeks since the peak the ASX 200 has fallen 24.7 per cent. The US Dow Jones is 22.1 per cent off record highs.
• Originally the concern was about the health of the Chinese economy. Now with the spread of the virus across the globe, the worry is about the health of the global economy. For investors the key issue is FOTU – fear of the unknown. This is a ‘panic’ or fear event – events that have been experienced numerous times in history.
• The difficulty for global sharemarket investors is that if you don’t know how company profits or earnings are affected, how do you price the company’s shares? So prices have swung widely as this “price discovery” process evolves.
• This morning the US Federal Reserve cut the federal funds rate from a range of 1.00-1.25 per cent to zero-0.25 per cent. The Fed will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion.
  https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315a.htm
• Reserve Bank New Zealand cut the Official Cash Rate (OCR) to 0.25 percent from 1.0 percent, and will hold it at this level for at least the next 12 months.
  https://www.rbnz.govt.nz/news/2020/03/ocr-reduced-to-025-percent-for-next-12-months
• The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank today announced “a coordinated action to enhance the provision of liquidity via the standing US dollar liquidity swap line arrangements.”
• This morning the Australian Council of Financial Regulators released a statement. The Reserve Bank “will be conducting one-month and three-month repurchase (repo) operations until further notice. In addition it will conduct repo operations of six-month maturity or longer at least weekly, as long as market conditions warrant.”
  https://www.cfr.gov.au/news/2020/mr-20-01.html
• In essence central banks and governments are embracing a “do whatever it takes’ approach to support economies in the current medical emergency.

Background

• The novel coronavirus outbreak began in a seafood market in Wuhan, China in late December 2019. It is believed the virus was passed from bat (or snake) to human. The South China Morning Post issued a report on January 1, “China shuts seafood market linked to mystery viral pneumonia outbreak.”
• On January 5 there were only seven references in world print media to ‘coronavirus’. References averaged around 200 a day from January 9-16. World consciousness of the virus increased from around January 20. On January 30 the World Health Organisation declared the novel coronavirus a global health emergency.
• The latest coronavirus has been likened to the SARS outbreak that occurred over 2002/03.
• On February 9, the New York Times cited China’s National Health Commission as saying that the number of confirmed infections stood at 37,198. “Eighty-nine deaths and 2,656 new cases were recorded in the preceding 24 hours, most of them in Hubei Province, the heart of the outbreak.” The SARS outbreak killed 774 people.
• The World Health Organization (WHO) releases Situation reports each day.
  (https://www.who.int/emergencies/diseases/novel-coronavirus-2019/situation-reports)
• The US Centres for Disease Control and Prevention have released detailed fact sheets on the virus.
  (https://www.cdc.gov/coronavirus/2019-ncov/about/index.html).
• Worldometer publishes statistics that tracks the coronavirus (https://www.worldometers.info/coronavirus/)

Chinese COVID-19 cases peak; varying responses by countries

• Initially the prospect of reduced travel activity with China caused travel and leisure stocks to fall across global sharemarkets. And metal and energy prices fell on the prospect for weaker Chinese economic activity, at least in the short term.
• China acted swiftly to close down factories and restrict air travel. The response by other countries was more varied with some quickly moving to restrict air travel while others had far fewer controls
• The number of active COVID-19 cases in China peaked at 58,016 on February 17. Active cases now stand at 12,088.
• Bloomberg Economics has been tracking a number of indicators to track the health of the Chinese economy. Bloomberg now estimates that the Chinese economy was operating at 80-85 per cent of normal capacity as of Friday March 13.
• However while productive capacity has lifted, the issue now is the potential for slower global demand of Chinese goods. Still, Chinese authorities can quickly implement fiscal stimulus such as infrastructure projects.
• Countries have had differing responses to the COVID-19 outbreak including external and internal travel restrictions and restrictions on mass gatherings. For information on travel restrictions: https://www.nytimes.com/2020/03/14/travel/coronavirus-travel-restrictions.html
• Italy now has the biggest number of active COVID-19 cases (17,750) from Iran (7,779), South Korea (7,253) and Spain (5,678).

Oil market

• Over March 5&6, the Organisation of Petroleum Exporting Countries (OPEC) and other key exporters like Russia (OPEC+ group) met in Vienna to discuss a proposal to further restriction oil exports. In response to reduced demand for travel as a result of COVID-19 the OPEC technical committee recommended production cuts totalling 1.5 million barrels per day. But Russia refused to agree with the proposal and Saudi Arabia responded by vowing to lift production in order to boost market share.
• Reuters reported on Friday that “Saudi Arabia has chartered more than 30 crude supertankers to export oil in coming weeks, specifically targeting big refiners of Russian oil in Europe and Asia.”
• Last week Brent lost US$11.42 a barrel or 25.2 per cent to US$33.85 a barrel with Nymex down US$9.55 or 23.1 per cent to US$31.73 a barrel – the biggest weekly declines since 2008.

Bear market

• Last week a number of global sharemarkets fell to levels more than 20 per cent below record highs. The artificial construct generally applied is that this now means that a ‘bear market’ exists.
• But no two environments are the same. It is important to note that markets like the US and Australian sharemarkets had rallied furiously over late 2019 and early 2020 to record highs. Most analysts believed that the markets were likely to experience a period of correction or consolidation at these lofty (expensive) levels.
• So while bear markets may technically exist, it is important to note that US and Australian sharemarkets are well supported by solid economic fundamentals. The corrections experienced on global sharemarkets have occurred in response to a ‘medical emergency’ rather than a ‘financial or economic emergency’.
• The tremendous intra-day volatility experienced across global markets is likely to continue as buyers and sellers engage in a tug-o-war in an attempt to determine appropriate valuations for key companies.

Some of the past sharemarket corrections

• In the Global Financial Crisis (GFC) of 2008/09 the Australian ASX 200 index peaked at 6828.7 on November 1, 2007. The ASX 200 hit its lows on March 6, 2009 at 3145.5, a drop of 53.8 per cent. It took 10½ years for the ASX 200 to return to record levels.
• In the SARS outbreak of 2002/03 (Sudden Acute Respiratory Syndrome) the ASX 200 hit highs of 3083.8 on December 2, 2002. The market fell 12.4 per cent to the March 13 low of 2700.4. The ASX 200 returned to highs on June 12.
• In the 9/11 terrorist attack in 2001, the ASX 200 was at 3242.6 ahead of the attack, fell 9.8 per cent on September 24 and then regained highs on October 24.
• In the 1987 sharemarket crash, the All Ordinaries peaked at 2376.88 on September 21, 1987. The All Ords fell 49.2 per cent to lows on February 10, 1988. The All Ords took over nine years to regain highs, reclaiming previous highs on December 27, 1996.

What are the implications for the economy and financial markets?

• The Federal Government and the Reserve Bank have jointly determined that the coronavirus could trim 0.2 percentage points from Australian economic growth in the March quarter. But both have indicated that a very fluid situation exists.
• Initially, it was expected that the main impact of the COVID-19 outbreak on the Australian economy was on tourism and education. This impact was especially seen from Australia’s dependence on China for tourist and student flows.
• But the Chinese economy is returning to normal. That doesn’t mean that tourist and student numbers are set to rebound as the Federal Government has tightened controls over inflows of people from across the globe.
• Now the Australian economy will be impacted from restrictions on mass gatherings and the postponement or cancellation of a raft of conferences, sporting, recreation and cultural events and special events – such as Sydney’s popular VIVID lights festival.
• Businesses have also responded by changing working arrangements such as directing staff to work from home.
• On fears that people could be directed to stay at home for an extended period of time, there has been high demand for longer-lasting staple items like rice, flour, toilet paper and hand sanitiser.
• Clearly a raft of businesses have been affected in varying ways. It is important to note that the effects haven’t been all negative. The Federal Government has compiled a package of health measures as well as an economic stimulus package. The measures have been well supported by social and business groups as well as across politics. State premiers and the Prime Minister will meet each week as part of a ‘national cabinet’.
• More stimulus is likely from Federal and State governments. But government finances are in good shape and thus well placed to apply stimulus without raising concerns of rating agencies. Financial market economists are in agreement that the Reserve Bank will cut the cash rate to a record low of 0.25 per cent at or before the April 7 Board meeting. Financial institutions will support businesses in these challenging and largely unique times.
• Australia avoided entering recession in the GFC but it will be harder to do so this time. But it is by no means impossible. Stimulus is being applied. The Chinese economy is returning to normal, supporting supply chains. People are still engaging in normal activities. And while some spending will be cut – such as on sporting events – there will be some replacement on streaming entertainment services, spending on food including food delivery.
• If the tighter regulation applied by countries on travel and mass gathering is successful in stabilising active COVID-19 bases, then they may follow the recovery path shown by China.