Fears over the spread of coronavirus have prompted a record plunge in the US stock market, as analysts warned the outbreak could wreak economic havoc on a scale not seen since the 2008 financial crisis.
The Dow Jones industrial average suffered its worst one-day fall – 1,190 points – losing 4.4%, as fears of a global pandemic hit investor confidence.
British officials sought to prepare the public for all eventualities. The chief medical officer, Chris Whitty, said that in the event of a global pandemic public events may have to be cancelled and schools closed for more than two months.
As three new cases were identified in the UK on Thursday, including the first in Northern Ireland, and Public Health England sent a specialist to Tenerife to help manage an outbreak there, the health secretary, Matt Hancock, said there was still “a good chance” of avoiding a pandemic but he acknowledged it was a “potential outcome”.
The value of London-listed companies has fallen by more than £150bn since markets opened on Monday, a prolonged selloff widely attributed to Covid-19.
As well as being the Dow’s worst points fall ever, the index’s 4.4% drop was its worst percentage fall in two years. Meanwhile the tech-focused Nasdaq index tumbled by 4.6%, its worst daily loss since 2011.
Scott Minerd of financial services firm Guggenheim Partners told Bloomberg TV that the coronavirus outbreak “is possibly the worst thing I’ve ever seen in my career”, a time-span which includes the 1987 crash and the collapse of Lehman Brothers.
“This has the potential to reel into something extremely serious,” Minerd warned.
“It’s very hard to imagine a scenario where you can actually contain this, and so that’s the thing that to me is very frightening.”
A flurry of big names joined the lengthening list of companies reporting a serious impact on their finances and warning of further pain ahead if the outbreak’s progress cannot be halted soon.
- Microsoft, PayPal and Standard Chartered all forecast disappointing profits.
- Facebook cancelled its annual developer conference in California where the company usually unveils new products to thousands of software engineers and entrepreneurs.
- Goldman Sachs warned coronavirus could wipe out profit growth at US companies in 2020.
- Aston Martin predicted falling sales and warned of disruption to its supply chain.
- Property firms pulled out of the industry’s annual Mipim conference, due to take place in Cannes next month.
- Budweiser beer owner ABInBev reported a $170m hit to profits.
- Advertising firm WPP quarantined staff returning from Asian countries.
- Cosmetics firm L’Oréal banned travel for its 86,000 staff.
- Shoemaker Crocs said Asian disruption would cut its revenues by up to $30m.
Some of the world’s best-known brands such as Apple, McDonalds and Starbucks have already counted the cost of the outbreak, while entire industries such as tourism, aviation and the automotive sector are struggling to cope with disruption.
Analysts are now warning that the combined effect of the virus and measures put in place to prevent its spread could weigh heavily on the global economy.
According to the consultancy Capital Economics, the outbreak turning into a full-blown international pandemic would trigger severe upheaval for world trade, markets and currencies on a par with the financial crisis, when global GDP fell by 0.5%.
Jennifer McKeown, head of its global economics service, said there was still hope that the outbreak could be contained, with limited negative impact for businesses and countries.Quick guide
However, she said: “One thing becoming clear is we just can’t predict the spread of this and how bad it can be. But it’s not difficult to get to something similar to the 2008 crisis with a pandemic situation. Of course, we hope it won’t get that bad.”
Central banks around the world would be all but powerless to mitigate the economic effect of so much business grinding to a halt, according to the Bank of England’s deputy governor Jon Cunliffe. “If it’s a pure adverse supply shock, there is not much monetary policy can do,” he said.
A supply shock is when there is disruption to production of goods and supply of services – such as shops and factories closing down. Monetary policy cannot keep them open.
On Wednesday night Donald Trump hailed “tremendous success” in tackling the virus, but Janet Yellen, a former chair of the Federal Reserve, later said the American economy could be driven into recession.
Goldman Sachs appeared to lend weight to her warning, predicting that US companies could record zero earnings growth this year if coronavirus spreads much further.
The price of oil tumbled to a 13-month low on expectations of reduced economic activity, while City investors rushed to buy assets seen as safe havens in times of turmoil, such as government bonds.
Supply shortages from manufacturers in China, where factories have been closed in an attempt to control the disease, have already combined with sharp decline in consumer demand to trigger a string of corporate profit warnings.
Demand for disinfectants such as Dettol and Lysol has soared, according to the household goods firm Reckitt Benckiser. However, the UK firm, which also makes brands including Nurofen, Durex and Finish, said it was seeing disruption at retailers and in distribution and supply chains.
Microsoft said supply chain disruption would affect its PC business, meaning it would miss sales forecasts, while PayPal predicted revenues at the bottom of its expected range.
Aston Martin, which is already struggling to reverse deepening losses, warned of an impact on sales and supply chains, pointing out that China has been its fastest-growing market.
The property industry is gearing up for its annual Mipim conference in the south of France next month, with organisers insisting it will go ahead as planned. But the pledge was cast into doubt after major real estate players including Land Securities, Cushman and Wakefield, Savills and Knight Frank pulled out amid concern about the possibility of contagion at large gatherings of people.
ABInBev reported that it had already suffered a $170m dent in profits during the first two months of 2020, echoing a damage report issued by fellow drinks maker Diageo this week. Diageo, which makes Johnny Walker and Guinness, said it faced a profits hit of up to £200m in its Asian markets.
L’Oréal has banned travel for its 86,000 staff until at least the end of March.
The tour operator TUI, British Airways owner IAG and easyJet were among the worst-performing UK shares due to concern about cross-border travel and tourism.
Many major banks could come under severe pressure if companies struggle to repay loans at a time when debt levels have surged beyond the previous peak seen before the financial crisis, hitting a record level of $188tn.
The International Monetary Fund has repeatedly sounded the alarm over surging global debt levels and the fragility of the financial system, particularly in China, where it warned that as much as 40% of corporate debt would be impossible to refinance in the event of a downturn just half as bad as the 2008 crash.
Recent central bank stress tests in China indicated that as many as 17 out of 30 big banks in the country would fail if economic growth slowed to 4.15%. Growth in the world’s second biggest economy dropped to 6.1% last year, the weakest pace since 1990, as the US-China trade war hit demand for goods and services.
Capital Economics said growth in China could fall to 3% this year under the best-case scenario for the country. Should the impact for the world economy remain limited, it said global growth would slow to 2.5% this year, down from its previous estimate of 2.9%.
First published at The Guardian Australia – Friday 28 February 2020. See; https://www.theguardian.com/business/2020/feb/27/coronavirus-could-trigger-damage-on-scale-of-2008-financial-crisis-covid-19