The weekend just gone was one where an epidemic began to have more economic consequences. In a world where there appears to be a Trump Tweet for pretty much everything this one from Friday is not going so well.
China has been working very hard to contain the Coronavirus. The United States greatly appreciates their efforts and transparency. It will all work out well. In particular, on behalf of the American People, I want to thank President Xi!
The media has revved itself up about the Corona virus and is in some cases treating it like a television series I remember from my childhood called Survivors.
It concerns the plight of a group of people who have survived an apocalyptic plague pandemic, which was accidentally released by a Chinese scientist and quickly spread across the world via air travel. Referred to as “The Death”, the plague kills approximately 4,999 out of every 5,000 human beings on the planet within a matter of weeks of being released. ( Wiki)
Fortunately we are a long way away from that situation although it must be awful for those affected. Let us switch our emphasis to the economic affects as we live up to the description of economics as the dismal science.
China
More and more cities are in lock down and this morning there has been this announcement.
SHANGHAI (Reuters) – The Shanghai government has said companies in the city are not allowed to resume operations before Feb. 9, an official at the municipality announced at a press conference on Monday.
The measure is applicable to government and private companies but is not applicable to utilities and some other firms such as medical equipment companies and pharmaceutical companies, the official said.
China’s cabinet has announced it will extend the Lunar New Year holidays to Feb. 2, to strengthen the prevention and control of the new coronavirus, state broadcaster CCTV reported early on Monday.
This will mean a lot of economic disruption as highlighted here by the Financial Times.
the manufacturing hub of Suzhou has postponed the return to work of millions of migrant labourers for up to a week. Suzhou is one of the world’s largest manufacturing hubs where companies such as iPhone contractor Foxconn, Johnson & Johnson and Samsung Electronics have factories.
One can see a situation where supply chains will be interrupted and presumably inventories will rise until there is not more room to store them. This may add to what has been something of a Perfect Storm for manufacturing over the past year or so.
According to the FT there is another area which has been hit hard.
Railway transport on Saturday, the first day of the lunar new year, fell about 42 per cent compared with the same day last year, according to the transportation ministry. Passenger flights were down by roughly 42 per cent and overall transportation across the country declined about 29 per cent.
If Chinese travel forms are anything like those of the western capitalist imperialists with their rather thin margins it may not be long before some are in trouble which may be why we have seen this being announced.
Companies would receive support “through measures such as encouraging appropriate lowering of loan interest rates, improving arrangements for loan renewal policies and increasing medium-term and credit loans”, the China Banking Regulatory Commission said.
We get an idea of the feared impact on the travel industry worldwide via the @RANSquawk update on share price moves today.
Air France (AF FP) -4.6%
Kering (KER FP) -4.6%
easyJet (EZJ LN) -4.0%
LVMH (MC FP) -3.5%
Ryanair (RYA LN) -3.0%
Airbus (AIR FP) -2.5%
So the initial impact is on manufacturing and consumption especially travel. That will be hitting a Chinese economy that was already slowing with reported economic growth falling to 6.1% at the end of last year.
The World
It may not be the best time for the FT to run with this.
Signs of a global recovery in manufacturing are starting to show
For example should the announcement below come to pass you would think it would have to affect trade between Germany and China.
GERMAN FOREIGN MINISTER MAAS SAYS WE ARE CONSIDERING EVACUATING GERMAN CITIZENS FROM CHINESE REGION AFFECTED BY CORONAVIRUS ( @DeltaOne )
That is certainly the picture being picked up by the price of crude oil which has been falling the past few days.
The coronavirus could cut into demand by around 260,000 bpd and reduce oil prices by about $3 per barrel, according to a report from Goldman Sachs. However, in the days following the publication of that estimate, oil prices fell by even more than $3. ( OilPrice.com ).
In fact the price of a barrel of Brent Crude Oil has fallen to US $58 as I type this as it tries to factor in lower travel demand and manufacturing. It would be even lower if the disastrous intervention by the West in Libya had not meant its output was so unreliable. Also the medical diagnosis of Dr. Copper is clear as we see it at US $2.63 this morning as opposed to the US $2.87 of as recently as the 16th of this month.
Bond Markets
These have been given yet another leg up as lower growth prospects mean they are more attractive. Although of course that theme is troubled these days as for example in Germany you do not get any yield and instead have to pay! As its bond market rallies we see that its benchmark ten-year yield has fallen to -0.37%. In my home country the UK the situation is also complex as it looks as though we are setting for a Bank of England interest-rate cut later this week as the Gilt market rallies and the ten-year yield falls to 0.53%. But I think it is really following other markets and perhaps trying to price the prospect of lower inflation as oil and commodity prices fall.
Stock Markets
These attract media attention much more.
FTSE 100 ‘in panic mode’ as coronavirus fears push it into red ( City-AM )
Actually it is down a bit over 2% and for context is above 7400 as I type this. so it is an odd type of panic that leaves it not far from the highs. Of course, equity market falls are persona non grata in the era of QE so let us remind ourselves that with the Nikkei 225 index falling 2% in Japan the Tokyo Whale will have had its buying boots on. Thus the Bank of Japan will have edged ever nearer to owning 100% of the exchange traded fund indices it buys.
Comment
We see a form of domino theory here.There are clear impacts on the travel and manufacturing sectors of China in particular. This will reduce economic growth although there will be an offset from the medical sector which will be at a maximum. Those who rely on Chinese economic output will be the first affected and once we move beyond airlines it is hard not to think of the South China Territory otherwise known as Australia. Lower iron ore demand for instance.
World manufacturing supply chains will be affected and as we have already noted this is another problem for that sector. If we look at a specific example all sorts of things may or may not happen to the planned Tesla gigafactory in Shanghai. Meanwhile central banking Ivory Towers are being instructed to research whether QE and lower interest-rates can battle the Corona virus.
