Covid-19

Coronaviruses are a large family of viruses that cause a variety of respiratory illnesses ranging from the common cold to more serious infections such as SARS and MERS. Recently a new strain of coronavirus has broken out which has been given the name COVID-19.

These coronaviruses are known to be zoonotic, which means they are initially transmitted from animals to humans. In this case, it is believed that COVID-19 originated from bats at a live market in Wuhan China. The first case was recorded in Wuhan China on December 1, 2019, and since then it has spread to over 100 countries around the world.

Common signs of infection include respiratory symptoms, fever, cough, shortness of breath, and breathing difficulties. In more severe cases, an infection can cause pneumonia, severe acute respiratory syndrome, kidney failure, and even death. COVID-19 has been found to be most dangerous to individuals over the age of 50.

Besides the obvious health concerns of coronavirus, there have already been severe economic impacts. Read on to learn more about how COVID-19 is affecting manufacturing, global markets, and the entire financial system.

COVID-19 and Global Manufacturing

Because COVID-19 began in China it has been the first country to feel the impacts of the virus. One of these impacts has been on manufacturing. As the virus spread factories were forced to shutter themselves to halt the spread of the virus to the workforce. In some cases, factories were simply unable to find enough workers.

This situation caused China’s Purchasing Managers Index, the official measurement of the strength of the country’s manufacturing, to plummet to 35.7 in February versus the January reading of 50. Anything under 50 indicates a contraction in manufacturing activity.

China is the world’s largest exporter, and it makes up roughly one-third of the world’s manufacturing capacity. This means the drop in Chinese manufacturing will have a ripple effect all across the world. Not only that, but as COVID-19 spreads individual countries will have their own manufacturing struggles.

As of mid-March 2020, Chinese factories are reportedly returning to normal, but at the same time, countries from South Korea to Italy to the United States are all being forced to quarantine their populations, shutting down much of the world’s manufacturing capacity.

Markets and Supply Chains Disrupted

One of the most obvious impacts of the manufacturing slowdown has been in the global supply chain. With Chinese manufacturing slowing companies all across the globe have seen their deliveries impacted. A recent survey of electronics manufacturers have shown most companies are now facing delays of three weeks in receiving necessary parts, and a smaller number have been quoted delays of six weeks or longer.

These delays will flow throughout the entire supply chain and many manufacturers don’t believe things will return to normal until July at the earliest, and potentially as late as October. 25% of those surveyed said it’s too early to say when the supply chain might return to normal.

Consumers will soon begin to feel the impact of this as some goods will become unavailable. Apple has warned of potential shortages in iPhones and parts, and Facebook has already begun to run short of their Oculus Rift VR headsets. That might only affect a small subset of consumers, but there are more far-reaching shortages looming. For example, Coca-Cola has reported that delays in components of artificial sweeteners could cause shortages of Diet Coke.

Other items could soon be in short supply as well. Take Procter & Gamble, which produces consumer products from detergents to toilet paper to diapers to toothpaste and much more. They have over 300 suppliers in China providing more than 9,000 different materials for their products. There’s no telling how many of those products could face shortages due to supply chain issues.

Other expected shortages will come in the automotive parts industry, the computer memory industry, and many others. It is expected that supply chain disruptions will impact roughly three-quarters of U.S. companies. And soon shipping and delivery challenges could add to the supply chain issues, especially if more countries are forced to impose a lockdown similar to that seen in Italy.

The Financial Impact of COVID-19

At this stage, it’s impossible to say what the total financial and economic impact of COVID-19 will be. At the very least companies and global economies will see one-quarter of reduced earnings and growth. The most obvious impact so far has been the huge volatility being seen in global financial markets, with nearly every major global stock index falling into a bear market. In the U.S. this has brought a halt to an 11-year old bull market and has seen some stocks losing half their value.

Around the world, sports leagues have suspended play, resorts, hotels, and recreation areas are closing, festivals are being canceled, schools are closing, and businesses are asking their workers to remain at home. All of this will have a huge impact on firms and financial markets, not just now but in the coming months as well.

In China alone, it is expected that growth will not only slow, but that first-quarter GDP could contract by more than 8%. And with cases rising around the world it’s possible this could be a global recession, pulling down every major and minor economy all across the world.

Individual companies will obviously be impacted differently, but earnings are guaranteed to contract for the majority of companies, and a good number of companies could go out of business due to the slowdown caused by the virus.

Global Pandemic Response

The response to the virus has been different in countries around the world, and that differing response has resulted in very different outcomes. For example, both Hong Kong and Singapore were hit early by the coronavirus, but each has less than 200 cases. Japan and South Korea saw spikes, but have quickly peaked in the number of new cases and reversed the spread of the virus. All of these countries had one thing in common, they responded rapidly to the threat of COVID-19 and they used all the elements at their disposal to combat the spread of the virus.

Contrast that with Italy or Iran. In both countries, the government appeared to be in denial regarding the disease prior to the first cases appearing within their borders. As people began to get sick in both countries the response was slow. Neither country did much testing. Neither did anything to stop mass gatherings, and the result has been an exponential increase in the number of cases, with both countries becoming overwhelmed.

In the U.S. the virus has just begun to take hold, but until now the response has been one of the worst globally. Very little testing has been done, the country’s leaders were in denial until the second week of March, and no measures were put in place to stop mass gatherings. That could be changing as much of the U.S. has put an end to mass gatherings as of March 15, and the government has been pulling out all stops to combat both the health impact and the economic impact of the virus.

As of mid-March, it’s clear that governments all across the globe are taking COVID-19 very seriously, and every possible action is being taken to lower the number of new cases and put an end to this pandemic as quickly as possible.

The COVID-19 Financial Crisis

Of course, in addition to the health crisis and economic crisis of COVID-19, there has also been a financial crisis in the world’s markets. This has extended to nearly every asset class as cash has once again become king, and everyone has been selling everything to raise cash.

This has caused some serious implications for financial markets as stocks have been battered, bond yields have fallen to historic lows, and even such safe-haven assets as gold and Bitcoin have seen selling to raise cash. The underlying fear beneath all of this is the threat of a deep global recession, or potentially even a global depression.

Not since the 2008 financial crisis have markets been under such duress. In the U.S. the Dow Industrials suffered its worst session since Black Monday in 1987. Crude oil has also been suffering steep losses as traders worry about falling demand and a price war between OPEC and Russia causes increased supplies to come to market at the worst possible time. That saw crude post its worst daily and weekly decline since the 1991 Gulf War.

The good news for financial markets is that banks are in far better shape now versus 2008. They have more capital and far greater liquidity now than in 2008.

Currency markets haven’t escaped volatility and gyrations either as central banks have been quick to cut interest rates and provide monetary stimulus measures. This has seen the U.S. dollar make huge gains versus rival currencies, with the exception of the safe-haven Yen, which itself has seen a massive surge in strength versus its rivals.

In Conclusion

The coronavirus has turned out to be far more than markets expected when it first appeared in December 2019. At that time, it was thought the virus would pose a problem for China, but the rest of the world would be able to compensate with some additional monetary stimulus and that life would go on as normal. The events of early March all across the globe have been far from normal.

The financial markets will recover, and when they do the gains could be spectacular. No one knows when this might happen though, so it will pay to remain vigilant. Keep an eye on individual stocks, sectors, and asset classes for signs of recovery, and be ready to jump in at an opportune time.

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