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Although stock markets are trading near all-time-highs, investors are prone to panic, and this is why we have recently witnessed sudden drops in share prices. On January 27, Wall Street slumped by 1.5%, its biggest drop in 6 months. Companies like Walt Disney (NYSE:DIS), Starbucks (NASDAQ:SBUX), Ford and Apple (NASDAQ:AAPL) announced they are closing outlets and otherwise reducing their activities in areas hit by the epidemic. The biggest losers on the London Stock Exchange are mining companies Rio Tinto (LON:RIO) and Glencore (LON:GLEN), due to the potential weakening of metal demand in China. Airlines like American Airlines (NASDAQ:AAL) and British Airways suspended flights in areas hit by the virus and the global tourism industry is being hit.
Today, the global economy is very interconnected, and any setback in one of the larger economies sends shock waves throughout the markets. Almost $400 billion were wiped out of the Chinese stock exchange once it reopened after the extended Lunar New Year holiday. The National Bank of China had already cut its interest rates and injected an additional 1.2 billion Yuan into the Chinese banking system in order to support the economy. As a result, the Yuan lost value, especially compared to the U.S. Dollar.
From the second part of January, the Australian dollar sharply fell by 5.5%. As a major trading partner of China fears over the coronavirus drove traders to sell the higher risk Aussie dollar. The Eurodollar saw volatility of 3.5% over the same period, as the dollar initially received some safe-haven bids, but then fell as it became clear that the Fed would take drastic action.
On March 3rd the Fed made a historic emergency cut in their base rate of 0.5% in an extraordinary attempt to manage the coronavirus’s economic fallout, and Bloomberg reports that at its next Fed meeting on March 18th policymakers will cut rates again. On the same date, the Australian central bank cut its rates and the day after the Canadian central bank followed. The ECB is also expected to cut rates in March, while Goldman Sachs (NYSE:GS) stated in a report that the Bank of England will cut rates by 0.5% in March and the UK may come close to a recession.
Meanwhile, the price of gold is still trading near its highest level, despite occasional oscillations. Gold is traditionally considered a safe haven investment in periods of economic or political turbulence. In the second half of January gold has jumped 6.7%, to more than 11-year highs. Gold has also been supported by the response to the coronavirus ie Global central banks either cutting rates or saying they stand ready to do so.
And while gold is rising, crude oil prices are under pressure. Over the same period, crude has fallen some 17.04%, although part of the drop is due to OPEC+ (in)decision on production cuts in an already oversupplied market. U.S. producers were already cutting work places due to continuously low energy prices, and the coronavirus outbreak only made things worse. Only a few weeks after the coronavirus outbreak, crude oil demand in China dropped by 20% due to flight cancellations, travel bans and production halt. China consumes 13 out of every 100 barels produced worldwide, which makes the drop in its consumption rate a matter of global concern.
What Could We Expect Next?
Economists still do not know the full impact the spreading coronavirus could have on the global economy while analysts state that the full impact of the virus won’t be clear probably until June (end of the second quarter). What is clear is that while the number of new cases has slowed in China, the coronavirus has spread internationally and this is causing the most recent shocks in the market. Italy, South Korea, France, Germany and now the US are being hit by rising numbers of people infected and many organisations such as the Organisation for Economic Development warn that the outbreak could more than halve global economic growth this year, with economists stating that many countries face a recession. With this in mind, the global central banks have already stated that they will do everything they can in order to minimize the economic impact of the coronavirus. Although it’s expected that the global economy will perform poorly this quarter there are expectations that global economic growth will recover by the end of the year. All of this assuming that the coronavirus doesn’t make a catastrophic turn for the worse.
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