The Disruption of Global Markets

The cascading economic impact of the new coronavirus (COVID-19) outbreak in China is becoming more apparent worldwide, with large multinational corporates cutting their sales forecast due to supply chain disruptions alarming global markets and governments downgrading growth prospects.

The fallout from the outbreak of the virus and China’s efforts to contain it—with more than 80,000 known cases and more than 2,500 deaths so far—comes at a particularly bad time for economies like Japan, Germany and Italy, which were just beginning to recover after a year of global trade tensions had weighed on their manufacturing and export figures. European exporters who are not as directly affected by the virus are feeling the impact as global value chains are increasingly connected and are having difficulty in emptying their containers located in Asia.

A special report brief issued by Dun & Bradstreet found that at least 51,000 companies worldwide, 163 of which are in the Fortune 1000, have one or more direct or “tier 1” suppliers in the impacted region, while at least 5 million — and 938 in the Fortune 1000 — have one or more “tier 2″ suppliers.

Travel Restrictions

Imposed travel restrictions to and from China aiming to try to contain the spread of the virus has already started impacting China’s Road & Belt push as Chinese workers cannot get to overseas projects, and factories are cut off from the Chinese imports they need to keep running.

Rapid Spread of Coronavirus

Outside of China, the virus is spreading rapidly outside of Asia to the Middle East where a big concentration is being detected in Iran and more importantly has reached Italy, Europe’s third-largest economy amid heightened fears of disruption in the global supply chain.  Two virus clusters are in the north, Italy’s financial and industrial heartland. Eleven towns in the Lombardy and Veneto regions are under quarantine, sealed off by police checkpoints where the regional government has ordered all factories to close. Travel restrictions in the area around Milan, the industrial centre of Europe’s third-largest economy, are a sucker punch for an economy already grappling with the slowdown in Germany, a high debt load, an aging population, and endemic corruption.

Whereas the number of deaths attributed to the Coronavirus (approx. 2,770) as of Feb 26, 2020 is minute compared to that of the flue (between 291,000 and 646,000 worldwide), it is not stopping consumers, companies and governments from treating it as a major pandemic and creating massive panic in the market.

Economic Lockdown

It’s one thing if Wuhan is on lockdown, another if all of China is on lockdown, another if all of Asia is on lockdown, and another if the global economy is on lockdown – such is the shift in market sentiment these days as nervousness about the spreading coronavirus gripped Wall Street, as the S&P 500 was down 0.4 percent at the end of trading, bringing its losses for the week to more than 6 percent. Bonds rallied, pushing the yield on the 10-year Treasury note to a record low for a second day, and the price of oil also fell. At this point the market is resigning itself to the fact that the impact of the coronavirus is going to be well beyond China and the first quarter of 2020.

The cost of the deadly coronavirus is starting to add up for banks across Asia where in China alone, S&P Global Ratings estimates the level of non-performing loans may triple, an increase of $800 billion. Ever since the Chinese government has allowed claims for force majeure,  such claims are increasing by the day and it remains to be seen how this will impact the financing of trade (LC issuance, confirmation and repayment) as international banks such as Credit Suisse, UBS and HSBC are telling their Hong Kong staff to work from home and are restricting travel.

Market Panic: Justified or Overblown?

The U.S. stock-market rally has been unravelling, with a period of historic gains coming to a screeching halt, as fear that the coronavirus epidemic may reach America rattles Wall Street.

Rising fears over the spread of the novel coronavirus are making some consumers hesitate to buy items shipped directly from China, but medical experts say the likelihood of contracting the illness via international packages is slim.