Don’t blame The Speccie. Modesty forces the admission that last week’s Australian sharemarket slump from its eight-day old record high may not have been entirely due to the immediate pre-slump heading on this page: ‘The time to panic is – NOW’. It was. According to the daily Bloomberg newsletter: People in dozens of countries are in varying states of panic about the spread of China’s highly contagious coronavirus. And traders in the world’s financial markets are panicking more than most. Last week, markets took investors on a wild ride that ended on a shockingly fast low note as companies put a halt to business travel and warned of hits to profits….
But Bloomberg reckons that broader signals indicate that markets are strong enough to survive the crisis – provided it is relatively short-lived. Others take the gloomy view that a recession is likely, expecting the outbreak to morph into a global pandemic. ‘This will compound the economic damage already evident through domestic disruption and worsening business and consumer confidence,’ for which the expected official stimulus through further lowering of record low interest rates will bring little benefit. ‘Monetary policy tools are simply not designed for this situation. All they can do is stimulate demand.’ But serious containment measures make any such demand hard to meet. Investors are about to learn that central banks won’t always be there for them in every situation. If this delicate faith that has kept markets rising should break, what then?
For Australia, the economic contagion through our major export markets in Asia, particularly Japan and South Korea, compound the direct problems with China. Prime Minister Morrison warns of challenging economic times ahead, particularly for exporters but also through disruptions to imports of essential items in the supply chain. So Treasury is working on ‘targeted, modest and scalable’ fiscal stimulus plans that, according to Professor Warren Hogan, could, if correctly timed and targeted, be the difference between a mild recession and something far worse. But the prospect of the government achieving its much-touted budget surplus in the current financial year is fading, with Finance Minister Mathias Cormann acknowledging that the triple-whammy of the coronavirus coming on top of the drought and bushfires ‘will have a negative impact on our economy and on the budget’.
So there is now an answer to the question raised on this page last month of whether China’s coronavirus would be ‘the pin that pricks the market bubble, not only because of its own direct impact, but by focussing attention on the riskiness of a debt-laden world.’ With the ASX still relatively high despite its sharp dip, the Australian’s James Kirby wrote at the weekend that you can’t continue to have a flat economy and a roaring sharemarket; rather than the market sell-off being an over-reaction to a scare, instead it was a rational correction that reflects the new reality that coronavirus may push the global economy into a recession
An unexpected long-term consequence of the coronavirus scare is the prospect of some de-globalisation to offset the disruption to supply chains (causing factory and vehicle assembly line shutdowns) due to the unavailability of China-sourced manufacturing components. The US relies on China for about 30 per cent of its imports of components, and China supplies key ingredients to the world’s pharmaceutical industry – but not, ironically, when the world needs them now to counter a possible pandemic.
Maybe we should all have a Bex and a good lie-down. According to one imaginative US commentator, the whole COVID-19 thing is really just another anti-Trump conspiracy: This virus scare has clearly been fully politically weaponised to stop Trump’s re-election. This was an engineered pathogen, an engineered crisis. It was set loose at a location where it would cause maximum economic harm. A coordinated panic campaign was carefully prepared to magnify the economic narratives and consequences. Daily fake gloom stories are now being strategically placed and seeded to spur a continued Dow Jones selloff, and provoke a panicked market collapse. Now do you feel better?
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