World last week: Covid-19 deals a heavy blow to the world economy

Black Thursday

Global stock markets plunged on March 12, in what was described as the “darkest Thursday” in history since “Black Monday” in October 1987. Some markets fell the most in decades. Measures taken by central banks failed to calm panic over the outbreak of the Covid-19 pandemic. The London stock market (UK) lost 10.87%, the biggest drop since 1987. Stock prices in France and Germany fell sharply by 12%, in Spain -14%, and in Italy - the epicenter of the Covid-19 epidemic in Europe, fell nearly 17%.

World stock markets were in the red on March 12 after the US President's travel ban from Europe. Photo: Chicago Sun Times

The market turmoil was “triggered”, causing a sell-off reaction explained by the decision of US President Donald Trump to suspend flights between the US and Europe for 1 month. Along with that, the European Central Bank decided not to lower interest rates, although it announced an economic stimulus package to deal with the Covid-19 pandemic.

“I don’t want to say panic, but it’s really unclear how things will play out. The United States has always been a defender of free markets and free trade. If people stop traveling, that’s not a positive sign. Now we’ve seen the Covid-19 crisis start to hit the economy.”

Robert Halver - Head of Capital Markets Analysis, Baader Bank

On Wall Street, major indexes such as the Dow Jones and S&P both fell sharply at the opening of trading. The S&P 500 fell sharply by 9.5%, with a total decline of 26.7% compared to the high set last month. The Dow Jones closed down 10%, the biggest drop since “Black Monday” 33 years ago. Stock trading sessions fell so fast that the US triggered an automatic 15-minute trading halt for the second time this week to stop the decline. In that context, the US Central Bank had to pour trillions of dollars into the bond market in a strong effort to prevent a repeat of the 2008 credit crisis.

In the Asian market, Japan's Nikkei 225 index hit a more than three-year low, while South Korea's Kospi index also slowed to 4.8%. Bitcoin recorded a 25% slide amid strong volatility in the cryptocurrency market. Meanwhile, the spread of Covid-19 has reduced people's travel demand, especially affecting the aviation industry in recent weeks. On March 12, the Civil Aviation Administration of China said that the country's airlines reported a total loss of 20.96 billion yuan (about 3 billion USD) in February. The number of air passengers in the past month has decreased by 84.5% compared to the same period last year.

Stock exchange employees look on in shock as the New York Stock Exchange plunges. Photo: Reuters

Analysts say President Donald Trump's new order banning all travel from European countries to the US for a month will put more pressure on the aviation industry, which has been hit hard by the Covid-19 pandemic. In particular, this decision will deal a heavy blow to foreign airlines such as Germany's Lufthansa and France's Air France KLM, which dominate the passenger market between Europe and the US. In addition, experts predict that the US government's move risks causing chaos at dozens of airports across Europe as passengers try to catch the last flight to the US before the ban takes effect. "The travel ban to Europe is a decision that investors did not expect. It will be a real financial blow to the tourism industry, which has been affected by the pandemic," said Tim Anderson, investment fund Tjm.

Oil price war escalates

The intense tension between Russia and Saudi Arabia over oil prices; the reduced demand for jet fuel, gasoline and diesel due to the impact of the temporary travel ban amid the Covid-19 pandemic... has caused the world oil market to face a nightmare scenario.

US crude oil prices fell another 6% to $31 a barrel after President Donald Trump announced travel restrictions with Europe. Global crude oil prices fell to a low of $30.02 a barrel, down 27% this week. Goldman Sachs cut its forecast for global crude oil prices in the second and third quarters of this year to $30 a barrel and warned that prices could fall to $20 a barrel in the coming weeks. Meanwhile, investors around the world are fleeing risky investments including stocks. A sign of the Great Recession.

Workers at an oil facility in Texas (USA). Photo: Reuters

The biggest problem facing the oil market right now is the collapse in demand for jet fuel. Thousands of flights have been canceled and are likely to be disrupted further by travel restrictions and concerns. Observers say travel bans are only adding to the fear and destroying demand for energy products. Rystad Energy estimates that a 30-day travel ban from Europe will result in a loss of 600,000 barrels per month in jet fuel demand. The fallout from travel bans is also weighing on investor confidence.

“This has led to further loss of confidence in the government's handling of the crisis, and increased uncertainty about the extent of the pandemic's impact on the broader economy.”

Bjoernar Tonhaugen - Head of Oil Markets at Rystad Energy

The collapse in oil prices has devastated energy companies large and small. If oil prices continue to fall as they have, most shale and oil sands production will become uneconomical. Many producers, especially small and medium-sized ones, will be hit hard because hydraulic fracturing—the process of drilling deep into the ground to extract oil and gas from shale deposits—is capital-intensive.

In such a context, the oil price war between Russia and Saudi Arabia, by keeping oil prices low, will also further destabilize the oil market. Although both will temporarily eliminate many competitors and put them in a position to be the biggest beneficiaries when oil prices rise again, both Russia and Saudi Arabia are also hurting themselves.

Oil prices are expected to continue to fall sharply next week. Photo: CNN

Oil exports account for about half of Saudi Arabia's gross domestic product and 70 percent of its export earnings, said Dr. Garbis Iradiang, head of the Middle East and North Africa division at the Washington-based Institute of International Finance. Saudi Arabia's budget deficit in 2020 was based on a price of $58 a barrel. With oil prices now falling further than before, Riyadh will have to increase its deficit, drawing down more than $500 billion in foreign exchange reserves.

On the Russian side, although its economy is more diversified than Saudi Arabia’s, Moscow could still lose market share to its rival if Riyadh sharply reduces prices for Western Europe, Russia’s main oil and gas export market. In addition, lower oil prices would mean less revenue from oil exports. However, since oil revenues account for less than half of total budget revenues, Moscow could balance its budget at $42 a barrel.