Markets face more turmoil as fears for global economy grow
UK businesses under threat of cashflow pressures because of coronavirus crisis
Financial markets face another volatile week as the escalating coronavirus crisis tips the global economy into a downturn that some companies will struggle to survive.
With France, Spain and Italy in lockdown, a sharp eurozone recession looks inevitable – despite shock emergency action by the US central bank on Sunday night. And while falling share prices captured the headlines last week, analysts believe a corporate debt crisis is building as global growth goes into reverse.
Fears of a cashflow crunch are also rising as self-isolating consumers shun shops and restaurants, and travel links are curbed.
“We cannot underplay the challenge at hand here. A huge proportion of UK businesses face significant cashflow pressures and without cash firms can’t survive for long,” Karim Haji, the head of financial services at KPMG UK warned.
“Banks’ margins are already squeezed, asset managers are especially vulnerable to the current market situation and insurers face the potential double hit of increased claims and decreased portfolios.”
MSCI’s All-Country World Index, the broadest measure of global stock markets, plunged by 12.4% last week, its heaviest losses since Lehman Brothers failed in 2008.
In a late revival, Wall Street surged by 9% on Friday afternoon after Donald Trump finally declared a national emergency over Covid-19.
And on Sunday night, the US Federal Reserve slashed interest rates to nearly zero, as part of a co-ordinated move by central bankers to protect the global economy. The move lowers borrowing costs to their crisis-era low of between 0.0% and 0.25%.
In a coordinated effort to see off a potential global economic crisis, the central bank also said it was working with the Bank of England, the European Central Bank and others to smooth out disruptions in overseas markets.
“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States,” the Fed’s rate-setting committee said in a statement. “The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses.”
But despite central bankers stepping in, airlines face a fight for survival as countries impose flight curbs.
“The shock decision to suspend flights between Europe and the US is about to take a heavy toll on the airline operators but it could be just a warm-up for what is to come now that Spain has declared a state of emergency because of the spread of Covid-19,” Matt Weller of Gain Capital said.
Middle East markets, which traded on Sunday, fell broadly. Egypt’s main share index tumbled by 7%, with Dubai falling 4%.
The sports retailer Nike is closing all its stores in the US, Western Europe, Canada, Australia and New Zealand for more than a week to try to curb the spread of the coronavirus, a reminder of the economic damage being caused.
Corporate bond prices have also come under heavy pressure since the coronavirus crisis began, amid rising fears that firms will default on their debts. Bonds issued by the travel industry, such as the US car-rental company Hertz, fell sharply last week.
“This certainly is another match being lit [near] the bonfire of corporate debt liabilities,” Simon MacAdam, a global economist at Capital Economics, told CNN. “There’s definitely potential for systemic risk.”
Analysts at Nomura predict the eurozone economy will shrink by at least 1.5% in April-June and contract by 0.8% during 2020 as a whole.
After three weeks of losses, some investors are looking for signs that the slump is bottoming out. But without effective, coordinated action, stocks and bonds could slide again – potentially adding to the 29% losses suffered by the UK’s FTSE 100 so far this year.
G7 leaders will hold a conference call on Monday to discuss the crisis – a chance to agree new measures to protect their economies. But the US treasury secretary, Steven Mnuchin, played down the suggestion the US could be falling into recession. insisting coronavirus will be a short-lived problem.
“Later in the year, obviously, the economic activity will pick up as we confront this virus,” Mnuchin told ABC.
The coronavirus pandemic has also hurt Saudi Arabia’s state-owned oil giant. Saudi Aramco promised to cut its spending this year to weather the coronavirus pandemic, after revealing on Sunday that its oil revenues fell by more than a fifth last year because of lower oil prices.
Aramco reported a worse than expected net profit of $88.2bn (£69.9bn) in 2019, down from $111.1bn in 2018, because of lower oil prices. The world’s most profitable company said it plans to spend between $25bn to $30bn this year, down from $32.8bn last year, after the Covid-19 virus wiped out oil demand forecasts for 2020.
The benchmark oil price averaged $64.26 a barrel last year, down from $71.34 a barrel the year before. The current price is below $34 a barrel and is forecast to remain low as the virus threatens a global economic recession.
The oil markets recorded their steepest price drop since the 1991 Gulf war, to lows of $33 a barrel last week, after Saudi Arabia waged an oil price war against rival “petro-nations” by vowing to ramp up oil production to record highs.
The kingdom instructed Aramco last week to raise the maximum rate of oil it can comfortably produce to 13m barrels of oil a day to secure its market share against rising oil exports from Russia and the US.
The Guardian (March 15, 2020)