Coronavirus sends the world closer to recession

Widespread panic selling grips stock markets after WHO declared Covid-19 a pandemic, compounded by US travel ban on Europe

by SHAHEERA AZNAM SHAH / pic by AFP

GLOBAL equities markets plummeted and oil prices tumbled yesterday as the coronavirus erased trillions of dollars in stock values and pushed the world closer to a possible recession.

Widespread panic selling gripped stock markets after the World Health Organisation (WHO) declared Covid-19 a pandemic.

Equities were further punished after US President Donald Trump announced a sweeping travel tban of European travellers in a televised address to counter the flu pandemic. The 30-day travel ban, however, excludes the UK.

Trump’s failure to announce a detailed economic-rescue package to counter the already battered stock markets, sent markets into a tailspin.

Japan’s Nikkei 225 closed 4.41% lower yesterday. Hong Kong’s Hang Seng Index dropped 3.66%, while China’s Shanghai Stock Exchange Composite Index lost 1.52%. Australia’s S&P/ASX 200 plunged 7.36%. South Korea’s Kospi Index shed 3.87%. India’s Nifty 50 lost 8.3%.

Back home, the FTSE Bursa Malaysia KLCI fell 1.69% or 24.4 points to 1,419.43.

European markets took the heaviest beating. As at 3.26pm GMT+1, German’s DAX fell 9.12%. UK’s FTSE 100 erased 9.21%. France’s CAC 40 declined 9.67%, while Belgium’s BEL 20 tumbled 11.23%.

The US key markets futures were already in the red before the start of trading. As at 1.18pm GMT, Dow futures plunged more than 1,000 points or 4.6%, while S&P 500 futures dropped 4.3% and Nasdaq futures fell 4.5%.

(At press time, 10.38am GMT-4 Dow Jones Industrial Average had tumbled 7.31%, while S&P 500 Index slid 6.36% and Nasdaq Composite slumped by 6.1%.)

Oil futures also tumbled as fuel demands are expected to thin.

Brent crude fell 6.2% to US$33.59 (RM143.26) a barrel on the ICE Futures Europe exchange as of 12:31pm in London. West Texas Intermediate declined as much as 7% and was 6.2% lower at US$30.94 a barrel on the New York Mercantile Exchange. The oil price war started by Saudi Arabia further cast a dark cloud to global outlook.

The oil price slump dragged the ringgit to a 30-month low to close at 4.2645 against the US dollar yesterday. The local unit has shed 4.24% of its value this year alone.

The government will lose billions in revenues and dividends from the oil sector with the recent drop. It is estimated that for every US$1 drop in oil prices, the government loses RM300 million in income. Malaysia’s 2020 budget is based on oil trading at an average of US$62 per barrel.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said a prolonged drop of the global economy could lead the world into a recession.

“WHO has designated Covid-19 as a pandemic, while the US has restricted travel from Europe to the US for the next 30 days.

“Such responses came after lockdowns of several jurisdictions in Europe. This would mean the global economy is under serious threat in the immediate terms.

“The recession is always a possibility if the global economy is disrupted,” he told The Malaysian Reserve.

The world collapsed into recession during the global financial crisis of 2007/2008, which dragged the US economy back to the level seen during the Great Depression years in the 1930s. The global recession during the crisis pushed economies into the red.

Mohd Afzanizam said: “In this case, we need to consider various scenarios including the possibility of a recession in order to be prudent and prepared.”

Putrajaya is already reviewing the economic stimulus package announced last month and the government is also expected to revise Budget 2020.

Mohd Afzanizam said the pandemic, coupled with the price war between the Russia and OPEC giant Saudi Arabia, had triggered the exodus to safe-haven currencies, subsequently punishing the ringgit.

“The US dollar index has gone up from 94.85 points on March 9 to 96.49 today. Similarly, the Japanese yen appreciated to 103.73 against the US dollar today from 112.1 in mid-February. The ringgit depreciated to RM4.264 today from RM4.163 on March 5.”

However, the Bank Islam analyst said the steep cuts of lending and policy rates announced by major central banks such as the US Federal Reserve, Bank of England and Bank of Canada should help to mitigate the pandemic’s impact.

“In the meantime, the risk-off mode will continue to dominate the foreign-exchange markets.”

He said the ringgit is expected to fall further to its resistance level of RM4.2734 in the immediate term.