A market pandemic

By The Editorial Board

(The Wall Street Journal) – The World Health Organisation (WHO) still hasn’t declared the novel coronavirus a global pandemic, but you wouldn’t know it from Monday’s convulsions in financial markets. The economic slowdown that started in China is now infecting global supply chains, and the economic harm may be broader than predicted.

The trigger for the 3.5% or so plunge in stock indexes was a spike in new coronavirus cases over the weekend in Japan, South Korea, Italy and Iran. This suggests a global breakout that may take longer to contain with more restrictions on travel, commerce and investment.

South Korea on Monday reported 763 cases, up from 30 last week, and the number of patients testing positive in Italy has soared to 229 from three a few days ago. New cases were also reported in Israel and Lebanon.

Italy has quarantined 11 northern towns to prevent the contagion from spreading to the business centre of Milan and tourist centre of Venice. South Korea’s government has shut down public gatherings and delayed school openings. Markets in South Korea’s viral epi-centre Daegu are ghost-towns.

Nearly 80,000 cases have now been confirmed across some 30 countries, which is about 10 times as many people as were infected with SARS in 2003. Most cases have been in China’s Hubei province where the virus originated, though the WHO says the epidemic appears to be ebbing in China despite a surge in cases two weeks ago following a change in reporting.

But it may still be too late to stop a pandemic. Hubei officials last week reported that a 70-year-old man developed symptoms 27 days after infection. This suggests the incubation period could be longer than the presumed 14 days and the virus may be mutating, which could make it harder to contain.

Businesses are naturally on edge. Many manufacturers have already shut down factories in China, and quarantines are creating transportation bottlenecks across the mainland. Port terminals have been jammed because of a shortage of workers and truck drivers. A decline in container traffic is exacerbating a slowdown in Chinese manufacturing and trade that is rippling to the rest of the world.

China now accounts for a third of global trade – about 10 times more than during the SARS epidemic – and about 20% of exports from South Korea, Vietnam and Japan. Many manufacturers have shifted production out of China in recent years amid trade uncertainty and rising labor costs, but it remains a linchpin in business supply chains.

Some economists are predicting that the epidemic could cause China’s GDP to shrink up to 10% year-over-year in the first quarter. The American Chamber of Commerce in Vietnam reported last week that more than half of its manufacturers were struggling to source supplies. United Auto Workers union officials say a shortage of Chinese parts could reduce output at General Motors factories in the US.

Panic is prompting more government travel restrictions. Israel is banning foreign visitors from Japan and South Korea. Afghanistan has closed its border with Iran. More countries may follow. The WHO seems to be trying to ease anxiety. “For the moment we are not witnessing the un-contained global spread of this virus,” Director General Tedros Adhanom Ghebreyesus said this weekend.

The U.S. isn’t an island economy, despite what you hear from some nationalists, and all of this will inevitably knock something off American GDP. Investors signalled as much with Monday’s rush out of equities and into US Treasurys, with the yield on the 10-year note falling to a near-record low of 1.38%. But keep in mind that the market for Treasurys is global, and much of the sprint to this safe asset included hot money from the Asia-Pacific.

The good news is that the US economy has a sturdy foundation in low unemployment, strong wage growth and robust consumer spending. Stocks are on the expensive side given some weaker corporate earnings, so a modest market correction doesn’t portend a recession. Market chatter already has the Federal Reserve cutting rates twice more this year, which for now does sound panicky. Rates are already low, and monetary policy can’t cure a supply shock caused by a virus.

This being an election year, the virus of politics can’t be ignored. Right on time, Senate Minority Leader Chuck Schumer blasted President Trump on Monday “for lack of leadership” on the virus, yet the US has so far had no deaths and only 35 known infections. This will get worse, but the Administration has been on the case since the beginning with quarantines, rescue flights for Americans, and briefings from public-health officials and disease experts.

The financial worry Mr. Schumer won’t admit is the rise of Bernie Sanders as his party’s presidential nominee. If the economy weakens, and the world thinks Mr. Sanders and his socialist agenda have a good chance of winning, that’s when investors may really panic.