Global equities markets, rattled by the coronavirus epidemic, are now getting further destabilised by human error. Monday’s dramatic 30 per cent plunge in oil prices, plus signs of viral panic in Italy, pushed some major Asian indexes down as much as 6 per cent, reversed a Chinese stock rally, and set off destabilising yen appreciation. The flight to safety is starting to look ominous.
After a long period of complacency about Covid-19, a move to cut risk exposure has got belatedly underway, pushing down stock values and inflating gold prices. But now monetary and political mistakes are compounding the sell-off.
For example, last week’s rate cut by the US Federal Reserve, intended to restore confidence, had the opposite effect. Italy’s initial inability to control the outbreak has led the government to implement an aggressive quarantine that could impact 16 million people — and raises the prospect that drastic methods that inhibit supply and demand could extend into the rest of Europe and beyond. Oil prices were bound to fall after Friday’s failure to reach an agreement on supply cuts within the Organization of the Petroleum Exporting Countries, but Saudi has now signalled for a full-fledged price war by slashing its own rates.
The question is what it will take to stop the bleeding. While cheap oil has some upsides for many large economies including Japan and India, it is also a leading indicator of softening global demand, and 30 per cent of East Asia’s GDP comes from exports, per World Bank data.
Local currencies have also been thrown off by the Fed move. The yen, for example, has gained a whopping 10 per cent since February 20, touching 101.6 per US dollar in morning trade, its strongest position since 2016. That’s terrible news for earnings at Japanese exporters, in particular carmakers like Toyota and Nissan. A weak dollar is a headache for other Asian economies too, including China.
Central banks have limited room to help. Nearly a decade of monetary expansion has reduced the returns from additional liquidity. Those already with negative rates have little room to move. Fiscal spending is way forward, but it’s not easy to paper over panic with handouts. Politicians will have to be creative, convincing and move fast.