Financial Contagion
On December 31st last year, China notified the World Health Organization of several cases of unusual pneumonia in Wuhan, a port city home to 11 million people in the central Hubei province. Seven days later, WHO reported that they had identified a new coronavirus disease called COVID-19 and declared a Public Health Emergency of International Concern. Since identification, 97,000 cases have been confirmed, of which 7,100 are classified as serious. The coronavirus has made its way to 87 countries and territories, with major outbreaks in Central China, South Korea, Italy, and Iran. More than 3,000 deaths have been reported in Mainland China alone, while only 300 people have reportedly died in other countries. The coronavirus outbreak has been attributed to disruptions in factory and logistic operations as well as supply shortages and panic buying. We find solace in reports from Johns Hopkins that 53,000 people have recovered from coronavirus. Though the disease can be fatal, health officials emphasize that more than 80 percent of people who have contracted the COVID-19 virus worldwide have experienced only mild to moderate symptoms and fully recover.
Total Confirmed COVID-19 Cases Updated Mar. 16, 2020 - Credit: Johns Hopkins Coronavirus Resource Center
Global markets are unhealthy because markets are a reflection of people and human nature. The two most noteworthy human traits being fear and greed:
Global stock markets fell on February 24th due to significant rises in the number of Coronavirus cases being reported outside of Mainland China. Various U.S. stock indexes including the S&P 500 Index, NASDAQ-100, as well as the Dow Jones Industrial Average posted their sharpest falls since 2008, with the Dow falling 1,191 points, the largest one-day drop since the 2008 financial crisis. Money has moved aggressively from the stock market and into perceived safety such as bonds and precious metals. Before the coronavirus contagion’s hit on the global economy, natural gas prices were already weakened due to a mild winter and have remained under $1.90. Internationally bound LNG cargoes have been canceled. Other impacts are implied and conjecture currently. Crude oil prices are possibly the hardest hit of any commodity. Drillers were already struggling with prices around $55 per barrel. The spread of the coronavirus has NYMEX crude oil prices closer to $42 per barrel. The reason for the decline is fairly clear as demand is reduced by decreased travel worldwide; travel and tourism is an energy-intensive activity.
As cases of the coronavirus have spread across international borders, a different kind of viral contagion has taken hold of financial markets. Within the past two weeks, various U.S. stock indexes including the S&P 500 Index, NASDAQ, and the Dow Jones Industrial Average posted their sharpest falls since 2008. The DJIA itself has undergone several days of +/-1,000 point changes as it swings violently between gains and losses. Volatility in equities has been transmitted to other markets as well. Crude oil has been perhaps the hardest hit of any commodity. Since February 20, WTI has lost over 20% of its value and plunged below $42 a barrel, its lowest level since August of 2016. The failure of OPEC and Russia to come to an agreement on further supply cuts this week has fueled the free fall. Even natural gas has gotten in on the sell-off contagion. Although gas was already crippled by a mild winter, prices weakness has been exacerbated by international LNG cargo cancellations and fear that low global prices will filter through to US export and industrial demand. With all this uncertainty, money is moving aggressively into perceived safety such as bonds and precious metals.
