Stock sell-off intensifies over coronavirus crisis

Federal Reserve officials on Friday began to signal a willingness to cut interest rates if the outbreak worsens, laying out a scenario in which the central bank might respond as infections and quarantines spread globally.

But rate cuts may have a limited effect. They work by stimulating demand, which could help if consumers and investors get spooked and stop spending. But cuts will do little to restart factories and correct supply problems.

China, the site of the first cases and the world’s second-largest economy, has ground to a halt as it struggled to contain the infection. Its factory shutdowns and quarantines have disrupted the global supply chain. Companies like Microsoft have warned that this will affect their sales, and Wall Street analysts have begun to factor those warnings into their expectations for profit growth this year.

More countries are reporting outbreaks, with over 83,000 people worldwide in at least 53 countries sickened so far. Hundreds of companies have begun taking measures to try to prevent the illness from afflicting their workers, including restricting travel and asking employees to work from home. All of these could curtail productivity.

“The economic implications of the coronavirus are difficult to ascertain as government and personal reactions to the epidemic are unprecedented,” analysts at Keefe, Bruyette & Woods wrote in a research note to their clients. “We expect that economic conditions will rebound once quarantines are lifted, but there will be a certain amount of activity that will be lost.”

Investors are responding by selling stocks, as well as commodities like oil, as they anticipate the coming slump. The selling itself could help bring the slowdown along as it discourages spending by companies and individual investors alike.

On Friday, the slide in Asia and Europe followed a 4.4 per cent nosedive in the S&P 500 index on Thursday, the worst day for US shares since 2011.

— In Europe, the FTSE 100 in Britain fell 3 per cent and the DAX in Germany fell 3.4 per cent.

— In Asia, the Nikkei 225 in Japan closed down 3.7 per cent, the KOSPI in South Korea dropped 3.3 per cent and the Shanghai Composite in China dropped 3.7 per cent.

— Oil prices continued a lurching drop, reflecting decreased demand as factories and transportation slow down. Brent crude, the international benchmark, fell as low as $US50.05 ($77.07) a barrel. It was above $US71 in early January. Money has poured into investments like gold and government bonds, which are generally considered safer.

Investment bank economists issued increasingly glum predictions of how much the coronavirus outbreak would hurt economies around the world.

More new infections are now being reported daily outside China, where the disease first appeared, than inside the country.

Scott Clemons, the chief investment strategist for private banking at Brown Brothers Harriman, said the outbreak’s potential to alter US consumers’ habits was at the heart of the Wall Street sell-off.

“To the degree that consumers change their behaviour – so they stop going out to eat, they don’t take the vacation, they cancel the business trip – that consumption, that spending, personal consumption is 68 per cent of GDP,” Clemons said.

Over the past few days, companies as varied as United Airlines, Anheuser-BuschInBev, Mastercard and Pfizer have said the outbreak poses a threat to their 2020 earnings.

The spread of the virus continued to reverberate through global companies Friday.

— Baker McKenzie, the law firm based in Chicago, shut its London office, which houses about 1,000 people, after a potential coronavirus case. “Our priority is the health and well-being of our people and our clients,” the firm said. “We have asked our London office employees to work from home for the time being while we are taking precautionary measures.”

— The airline group IAG, which owns British Airways and Iberia, said that it expected earnings to be weaker because of the virus, but that it could not give accurate profit guidance for the year because of the uncertainty of the situation. And EasyJet, a British budget airline, said that it had seen a drop in demand for flights, particularly to northern Italy. It said it would cancel flights and try to save costs in other areas.

— The Global Business Travel Association said that nearly two-thirds of the members it surveyed had cancelled meetings and that most companies in Asia had put a hold on business trips in the region. “It is fundamentally affecting the way many companies are now doing business,” said Scott Solombrino, the group’s chief operating officer and executive director. “If this turns into a global pandemic, the industry may well lose billions of dollars.”

— The governor of the Bank of England, Mark Carney, said in an interview with Sky News that the central bank had detected a fall in business activity in Britain because of coronavirus, but that it was too soon to predict how badly the economy would be affected.

— The Swiss government banned all gatherings of more than 1,000 people at least until March 15, forcing the cancellation of the Geneva International Motor Show. European car companies are already dealing with plunging sales in China and supply chain problems, and now they are losing one of their premier marketing events in Europe.

The overall effect of the outbreak on global corporations could increase the chance of a broader economic slowdown, analysts say.

“The more countries that are faced with fighting a pandemic, the wider the potential for economic disruption and potential for increased recessionary risks,” Tai Hui, chief market strategist for Asia at J.P. Morgan Asset Management, said in a research note on Friday.

The outbreak is also affecting travel for US residents, with a decline of 19.3 per cent in bookings in the five weeks to February 17, according to the travel analytics firm ForwardKeys.

The United States is the world’s second-largest outbound market after China, which by early February had seen travel bookings more than cut in half.

“Now it’s not just China, but the world’s second largest and second-highest spending outbound travel market, the USA, which is stalling,” said Olivier Ponti, vice president of insights at ForwardKeys

In the Asia Pacific region, bookings collapsed by nearly 88 per cent compared to the same time period from last year, ForwardKeys said. The number of trips to Europe booked from the United States declined 3.6 per cent.

New York Times