World Stock Markets Plunge Over Fear of Coronavirus; WHO Raises Contagion Risk

RIO DE JANEIRO, BRAZIL – The effects of the coronavirus have ‘infected’ stock markets around the world, which awoke on Monday with declines stemming from the fear of the 2019-nCoV advancing, or the Wuhan virus – as it was also named, in reference to the Chinese city where the micro-organism was first passed from an animal to a human being.

On Monday, the fear of the disease’s advance, which has infected over 4,000 people and killed 106, impacted the financial markets: Spain’s main stock exchange index, the Ibex 35, closed the day with a two percent drop, a few tenths below its European partners, while the IBOVESPA, the main index of the São Paulo Stock Exchange, fell 3.29 percent.

The CAC40 in Paris, the German Dax, and the London FTSE suffered declines of more than 2.2 percent. Chinese stock exchanges averted the impact by remaining closed for the new lunar year’s holiday, but Japan’s Nikkei also dropped more than two percent.

One of the most directly affected sectors was tourism. The IAG airline group (which includes British Airways, Iberia, Vueling, and Air Lingus, among others) reported losses of five percent on Monday, while the online travel agency eDreams exceeded seven percent.

The hotel sector failed to shake off investors’ panic: Meliá Hotéis fell by about five percent and Amadeus, a provider of technology solutions for tourism companies, lost over six percent. The red was replicated in other European companies in the sector: Easyjet and AirFrance suffered losses similar to those of the IAG. Lufthansa, over 4.5 percent.

Fear over the virus has reduced the flow of travelers who have China as their origin or destination, which translates into fewer ticket sales and even potential flight cancellations.

The barrel of Brent oil, a reference in Europe, fell almost three percent on Monday alone and recorded its lowest price in three months, below US$59 (R$248), when a week ago it was sold at almost US$65. The shock felt by the oil market also affects the currencies of some producing countries, such as Russia and Mexico.

Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman, attributed the collapse to “psychological factors,” in statements to the media, and recalled that the SARS outbreak in 2003 ultimately “did not cause a significant reduction in demand for oil”. However, downward pressures on the oil market were strong enough to offset increased uncertainty in the Middle East (following the attack on the US embassy in Baghdad), a factor that usually drives up prices for Texas and Brent crude oil barrels.

The coronavirus outbreak originated in the city of China’s leading car and steel producers, two key industries of the world’s second-largest economic power. The city of Wuhan, located in Hubei province (in the center of the Asian giant), also has more than 300 multinational companies, so fear spread as more information about the infection surfaced.

Meanwhile, investors remain on the lookout for next Wednesday’s meeting of the US Federal Reserve and the Bank of England on Thursday – a day before the UK leaves the EU. The purchase of traditional safe-haven assets, such as gold and the yen, soared.

Many countries have already begun to take direct action to halt the spread of the coronavirus, as the World Health Organization (WHO) has come to classify the international risk of contamination as “high”. Russian travel operators stopped selling flights to China on Monday morning, said Dimitry Gorin, vice president of the Russian Tour Operators Association, following the country’s regulatory body’s recommendations. Only return ticket sales were maintained.

Other countries adopted even more radical measures: Mongolia announced on Sunday the closure of all its border crossings with China, while the Chinese government has begun to impose a state of quarantine in major cities with the disease, which affects over 50 million people. The European Union’s Health Security Committee met on Monday to decide its scope of action after three cases were diagnosed in France. EU Health Commissioner Stella Kyriakides said before the meeting that the bloc was “ready to act and intensify our response if required”.

“It is too early to quantify the economic impact of the coronavirus, but when it comes to dealing with unexpected shocks like this, the most reasonable approach seems to be to assess the precedents,” explained AXA Investment financial analyst Gilles Moëc in a statement, who recalled the SARS outbreak in 2003, a virus of the same family that also originated in the Asian giant.

“The crisis caused by SARS reduced China’s GDP by 1.1 percent and Hong Kong’s by 2.5 percent, but resulted in an impact of only 0.1 percent on US GDP,” says the AXA economist. Standard & Poor’s preliminary estimates concur with this assessment: the rating agency suggests that a ten percent decline in affected sectors would reduce the Asian country’s GDP growth by 1.2 percent.

However, AXA Investment’s analyst notes that China’s weight in the world economy has increased significantly, so contagion in the world economy is likely to be greater now. “Although it is necessary to emphasize that it is still too early to know whether SARS and its economic effects are the correct precedent to assess the impact of the coronavirus”.

Moëc stressed that “contacts between China and the rest of the world have skyrocketed over the past 15 years and the emergence of large-scale sources of contagion beyond the Greater China region would obviously change the equation”.