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Global financial market swoons on oil price dive, coronavirus angst

(Xinhua)    13:06, March 11, 2020

BEIJING, March 11 (Xinhua) -- Broader stock sell-offs and a massive oil price tumble have roiled the global financial market since the start of the week, fueling panic that the world economy would sink into a potential downturn amid the fast-evolving spread of COVID-19 worldwide.

SHOCKWAVES ON "BLACK MONDAY"

The free-falling three major indexes have sent chills down the spine of the U.S. stock market, with the Dow Jones Industrial Average plummeted over 2,000 points at market close on Monday, marking its worst day since 2008.

Wall Street kicked off the week with bloody losses, as the S&P 500 slumped more than 7 percent shortly after the opening hour, triggering a circuit-breaker to halt trading for 15 minutes, in a bid to stem further dives.

The nosedive came after a price war between major oil producers Saudi Arabia and Russia over the weekend following the collapse of a supply cut deal between the Organization of the Petroleum Exporting Countries (OPEC) and its alliance.

The Saudis have planned to ramp up production and slash crude prices to vie for global market shares against Russia, pushing investors to flock to safe havens.

In response, the price of crude oil tumbled over 24 percent on Monday, with both West Texas Intermediate crude and international benchmark Brent crude suffering their largest falls since 1991.

Fears over a potential all-out oil price war and an ensuing economic recession also gripped investors in Europe and Asia.

Europe's stock market also stepped into the deep red territory, marking one of its darkest days in years. On Monday, the pan-continental Stoxx Europe 600 index once plunged over 6.5 percent, with sharp losses in Germany (-7.1 percent) and France (-7.3 percent).

Britain also saw its stock market sliding into one of its worst days in decades with the FTSE 100 index plunged by 8.5 percent at the start of trading.

Italy's market nosedived by 10 percent after Rome announced plans to quarantine millions of people in the north of the country.

The alarming stock performance prompted investors and traders to flee for safety, dragging down the benchmark 10-year U.S. Treasury yields to a record low of 0.318 percent. Yields move inversely to bond prices.

The number of countries with negative bond yields also continued to expand. Five-year UK yields traded below zero for the first time, and France, Germany, Spain and Japan all traded in negative territory on Monday.

In the foreign exchange market, the Japanese yen and Swiss franc, the widely-recognized safe haven currencies, surged against the greenback on Monday, as investors' risk aversion elevated. In particular, the Japanese yen rose to trade 102.15 to the U.S. dollar around market close, marking its strongest level since 2016.

HEADWINDS, CAUTION ACROSS THE BOARD

Market participants and observers have been carefully weighing the larger economic impacts of oil price slumps and the spreading COVID-19, bracing for more volatility and complexity.

Though traditionally lower oil prices in themselves are not negative for the global economy, the scale of the adjustment in prices so far "will be challenging for the market to absorb," said Mark Haefele, global chief investment officer of Swiss financial institution UBS, in a research report on Monday.

His view was echoed by further elaboration of analysts in the industry.

The latest slump in oil prices will only add to "the immediate headwinds facing the world economy," as the effects of the 73-percent drop in oil prices in 2014-2015 indicated that falling oil prices are not necessarily positive for boosting demand in recent years, said Jennifer McKeown, head of Global Economics Service of Capital Economics, a London-based economic research consultancy.

"Since coronavirus fears are limiting discretionary spending and even causing lay-offs in some countries, it seems particularly unlikely that households will respond to lower energy costs by spending more now," McKeown said in a note to clients on Monday.

Significant falls in the stock market would also feed into weaker demand by reducing household wealth, according to Neil Shearing, group chief economist of Capital Economics.

"These effects can be self-reinforcing, since factory shutdowns can reduce the income of workers, which in turn reduces spending," Shearing said in a note to clients on Monday.

He pointed out that the shock incurred by the novel coronavirus has affected both the supply and the demand side of the global economy, as factory shutdowns, travel bans, supply-chain disruptions and closures of school, restaurants and cinemas have subdued normal economic drivers.

He further suggested that fiscal support, such as loans and subsidies, be provided to the affected companies to help mitigate the virus shock, adding that monetary support, including central banks' cheap finance to other banks, can also help to counter some of the financial strains.

"But the speed of recovery will depend in large part on how the virus spreads and when the containment measures are lifted and life returns to normal," Shearing said.

Jeremy Kress, assistant professor of business law at University of Michigan, urged more oversight of financial markets to better cope with current uncertainties.

"In the face of a global pandemic and fears of a macroeconomic slowdown, now is the time to strengthen oversight of financial markets, not (to) roll back regulations as the big banks insist," he said.

KEEPING AN EYE ON POSITIVE SIDE

In this regard, researchers of McKinsey & Company predicted in a latest report that three broad economic scenarios might unfold in the future, namely a quick recovery, a global slowdown, and a pandemic-driven recession.

They warned that the global slowdown will probably take place if most countries are not able to achieve the same rapid control that China has managed. In this case, small- and medium-sized companies would suffer more acute impact.

Yet the report emphasized that the prevalent pessimistic narrative, which both markets and policymakers seem to favor as they respond to the virus, "underweights the possibility of a more optimistic outcome to COVID-19 evolution."

Jin Jianmin, a senior fellow at Fujitsu Research Institute in Tokyo, opined that how the global economy would develop depends, on the one hand, on how soon China would manage to fully contain the COVID-19 contagion and return to normal its social and economic life, which will provide an essential reference to the global markets.

Meanwhile, it also hinges on whether the international community would set up a strong collaboration mechanism to jointly fight the epidemic and coordinate governmental policies to stabilize the global market.

"I hope the international community to pull together in times of trouble, so as to stabilize market expectations and defeat the novel coronavirus epidemic," he said.

UBS also believed that economic cost caused by declining consumer spending on travel and leisure activities due to the coronavirus fears will be "near-term."

Haefele added that the latest news has been "rapidly bringing forward the prospect of greater fiscal stimulus," as fiscal measures have been under discussion in many countries like Germany and the United States.

He mentioned that over the weekend, the number of new cases in China, excluding Hubei province and imported cases, dropped to zero. In South Korea, the rate of increase in new cases has also been slowing.

"Growing evidence that the virus can be contained in a relatively short time period with specific policies could engender market and business confident that the outbreak needn't be prolonged," he noted.

(For the latest China news, Please follow People's Daily on Twitter and Facebook)(Web editor: He Zhuoyan, Bianji)

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