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Coronavirus is fast becoming an 'economic pandemic' – CNN

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The number of infections in South Korea, a major producer of cars, electronics and machinery, has shot up to more than 830. Italy, which started the weekend with a handful of cases, now has nearly 220 and five confirmed deaths. Officials have shut down public buildings, schools and sports events in some parts of the country’s industrial north.
Investors are betting on a quick recovery from coronavirus. What if they're wrong?
With Japan already reporting hundreds of infections, four of the world’s top 12 economies — representing about 27% of global GDP — are now scrambling to contain the virus. A fifth — Germany — is teetering on the brink of recession.
The spike in cases outside China signals a new phase in the battle against coronavirus, greater risk for companies and their workers, and global economic growth.
Officials and business leaders had been hoping that dramatic action taken by China would slow the spread of coronavirus and prevent it from gaining traction around the world.
If China’s factories were able to restart production quickly after an extended shutdown, the world’s second largest economy would have a chance to return to normal in the second quarter.
Under that scenario, global growth this year would only be 0.1 percentage points weaker than expected, Kristalina Georgieva, the managing director of the International Monetary Fund, said over the weekend. The IMF boss cautioned, however, that she was also looking at “more dire scenarios” where the outbreak turns out to be “more persistent and widespread.”

Economic damage

Stock markets, which had so far largely brushed off the threat from coronavirus, are now reflecting the growing risk of a much bigger hit to the global economy.
The sharp increase in infections in Italy and South Korea, the world’s eighth and twelfth largest economies, produced a sharp reaction from investors. South Korea’s benchmark share index closed down nearly 3.9%, its worst day since October 2018. In Italy, the main market index was down 5.5%. The Dow opened down 950 points, or 3.3%.
Reduced demand for goods and services, and factory closures in China, were already expected to slam Chinese growth in the first quarter, weigh on trade and slow global growth. But the spread of the virus increases the risk of substantial damage to economies that were growing at a much slower place than China — or, as in the cases of Germany, Italy and Japan, already at risk of recession.
“When the virus was limited to China and other nearby countries, it was viewed as an economic issue for Asia,” said Kevin Giddis, chief fixed income strategist at Raymond James. “The spread of the virus into Italy now makes this a European issue and possibly a global issue that could upset the supply chain for months or years to come.”
Coronavirus market freakout: Stocks flew way too close to the sunCoronavirus market freakout: Stocks flew way too close to the sun
Italy’s economy contracted by 0.3% in the final three months of 2019, compared to the previous quarter, and some economists were expecting the country to fall into recession early this year before the coronavirus outbreak escalated.
The bulk of cases in Italy are in the northern region of Lombardy, whose capital is the financial center of Milan. Turin, which is home to Fiat Chrysler (FCAU), is located to the west of Milan, while other carmakers including Ferrari are situated to its southeast. Milan is also home to many luxury goods makers, and the city just hosted its annual fashion week.
Officials have yet to track down the first carrier of the virus in Italy. Restrictions designed to stop the spread of coronavirus in the country affect about 100,000 people.
The coronavirus is also hiking the risk of recession in other countries. The economy of Japan, which has reported 840 cases, including 691 from the cruise ship Diamond Princess, shrank 1.6% in the fourth quarter of 2019 as the country was slammed by a sales tax hike and a powerful typhoon. Another quarter of contraction will put the world’s third biggest economy into recession.
Germany, the biggest economy in Europe and number four in the world, ground to a halt right before the coronavirus outbreak set in, dragged down by the country’s struggling factories. German companies rely on China to buy cars and other products, and economists at Berenberg bank said Monday they now expect the economy to contract in the first quarter of 2020.
A worker sprays disinfectant to help prevent the spread of the  coronavirus in Seoul.A worker sprays disinfectant to help prevent the spread of the  coronavirus in Seoul.
South Korea is also in a vulnerable position.
Exports to China, its largest market, were positive in December for the first time in 14 months. But research firm Oxford Economics expects both exports and industrial production to suffer because of the outbreak in China.
It warned that South Korean electronics, autos and electrical equipment makers could struggle to get the parts they need from China to keep their factories running. Hyundai (HYMTF) has already been forced to stop production at plants in South Korea because of parts shortages.
And because people are more likely to stay home during an outbreak to avoid getting sick, consumer demand could suffer in South Korea. President Moon Jae-in said the country was at a “watershed moment” Sunday, as he issued the highest level of national alert and ordered new resources to tackle the outbreak.

A global issue

A slew of companies including Apple (AAPL) have warned that the coronavirus will prevent them from meeting sales or profit targets for the first three months of the year. But many of the financial projections assumed the coronavirus would be contained to China.
The International Air Transport Association, for example, warned last week that coronavirus could cost global carriers nearly $30 billion in lost revenue. Global demand would drop by 4.7%, the first decline since the financial crisis.
The group’s estimate was based, however, on the disruption caused by SARS when it ripped through China in 2003. That virus caused real economic damage over a period of months, including for airlines, but the sharp decline in activity was “followed by an equally quick recovery,” according to IATA.
“We don’t yet know exactly how the [current] outbreak will develop and whether it will follow the same profile as SARS or not,” IATA warned.
The continued spread of the novel coronavirus makes the SARS comparison increasingly tenuous.
Major central banks have used up much of the ammunition they would typically deploy to fight economic downturns since the 2008 financial crisis, and global debt levels have never been higher. Those factors could limit the response by policymakers around the world.
Diane Swonk, the chief economist at Grant Thornton, said Monday on Twitter that there is a growing consensus among economists that the US Federal Reserve will have to cut interest rates, perhaps as early as next month, in response to the coronavirus.
“It may not be called a health pandemic yet but it is an economic pandemic,” she said.

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Soft landing hopes for U.S. economy brighten outlook on stocks – The Globe and Mail

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Optimism is seeping back into the U.S. stock market, as some investors grow more convinced that the economy may avoid a severe downturn even as it copes with high inflation.

The benchmark S&P 500 has rebounded about 15% since mid-June, halving its year-to-date loss, and the tech-heavy Nasdaq Composite is up 20% over that time. Many of the so-called meme stocks that had been pummeled in the first half of the year have come screaming back, while the Cboe Volatility Index, known as Wall Street’s fear gauge, stands near a four-month low.

In the past week, bullish sentiment reached its highest level since March, according to a survey from the American Association of Individual Investors. Earlier this year, that gauge tumbled to its lowest in nearly 30 years, when stocks swooned on worries over how the Federal Reserve’s monetary tightening would hit the economy.

“We have experienced a fair amount of pain, but the perspective in how people are trading has turned violently towards a glass half full versus a glass half empty,” said Mark Hackett, Nationwide’s chief of investment research.

Data over the last two weeks bolstered hopes that the Fed can achieve a soft landing for the economy. While last week’s strong jobs report allayed fears of recession, inflation numbers this week showed the largest month-on-month deceleration of consumer price increases since 1973.

The shift in market mood was reflected in data released by BoFA Global Research on Friday: tech stocks saw their largest inflows in around two months over the past week, while Treasury Inflation-Protected Securities, or TIPS, which are used to hedge against inflation, notched their fifth straight week of outflows.

“If in fact a soft landing is possible, then you’d want to see the kind of data inputs that we have seen thus far,” said Art Hogan, chief market strategist at B. Riley Wealth. “Strong jobs number and declining inflation would both be important inputs into that theory.”

Through Thursday, the S&P 500 was up 1.5% for the week, on track for its fourth straight week of gains.

Until recently, optimism was hard to come by. Equity positioning last month stood in the 12th percentile of its range since January 2010, a July 29 note by Deutsche Bank analysts said, and some market participants have attributed the big jump in stocks to investors rapidly unwinding their bearish bets.

With stock market gyrations dropping to multi-month lows, further support for equities could come from funds that track volatility and turn bullish when market swings subside.

Volatility targeting funds could soak up about $100 billion of equity exposure in the coming months if gyrations remain muted, said Anand Omprakash, head of derivatives quantitative strategy at Elevation Securities.

“Should their allocation increase, this would provide a tailwind for equity prices,” Omprakash said.

Investors next week will be watching retail sales and housing data. Earnings reports are also due from a number of top retailers, including Walmart and Home Depot, that will give fresh insight into the health of the consumer.

Plenty of trepidation remains in markets, with many investors still bruised from the S&P 500′s 20.6% tumble in the first six months of the year.

Fed officials have pushed back on expectations that the central bank will end its rate hikes sooner than anticipated, and economists have warned that inflation could return in coming months.

Some investors have grown alarmed at how quickly risk appetite has rebounded. The Ark Innovation ETF, a prominent casualty of this year’s bear market, has soared around 35% since mid-June, while shares of AMC Entertainment Holdings , one of the original “meme stocks,” have doubled over that time.

“You look across assets right now, and you don’t see a lot of risks priced in anymore to markets,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management.

Keith Lerner, co-chief investment officer at Truist Advisory Services, believes technical resistance and ballooning stock valuations are likely to make it difficult for the S&P 500 to advance far beyond the 4200-4300 level. The index was recently at 4249 on Friday afternoon.

Seasonality may also play a role. September – when the Fed holds its next monetary policy meeting – has been the worst month for stocks, with the S&P 500 losing an average 1.04% since 1928, Refinitiv data showed.

Wall Streeters taking vacations throughout August could also drain volume and stir volatility, said Hogan, of B. Riley Wealth.

“Lighter liquidity tends to exaggerate or exacerbate moves,” he said.

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Malaysian economy smashes forecasts, growing 8.9 percent in Q2 – Al Jazeera English

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Southeast Asian country continues strong pandemic recovery after reopening its borders in April.

Malaysia’s economy grew at its fastest annual pace in a year in the second quarter, boosted by an expansion in domestic demand and resilient exports, but a slowdown in global growth is expected to pose a risk to the outlook for the rest of 2022.

Gross domestic product (GDP) in April-June surged 8.9 percent from a year earlier, the central bank said. This was faster than the 6.7 percent growth forecast in a Reuters poll and was up from the 5 percent annual rise in the previous quarter.

It was also quicker than any annual rate seen since the second quarter of 2021, when GDP was 16.1 percent higher than a low year-earlier base.

Seasonally adjusted GDP for April-June was up 3.5 percent on the previous three months, when quarterly growth was 3.8 percent.

Malaysia’s economy has been on a strong recovery path since the country reopened its borders in April.

“Going forward, the economy is projected to continue to recover in the second half of 2022, albeit at a more moderate pace amid global headwinds,” Central Bank of Malaysia Governor Nor Shamsiah Mohd Yunus told a news conference.

Full-year growth for 2022 would likely be at the upper end of the previously forecast range of 5.3 percent to 6.3 percent, Nor Shamsiah said.

Headline and core inflation were expected to average higher in 2022, though Nor Shamsiah said any adjustments to the overnight policy rate would be measured and gradual to avoid stronger measures in the future.

The central bank lifted its benchmark interest rate for the second straight meeting in July.

Capital Economics said in a note it expected Malaysia’s economic growth to slow in coming quarters, as commodity prices dropped back and the boost from border reopening fades.

“That said, the slowdown is likely to be relatively mild, with the reopening of the international border set to provide decent support to activity,” said Gareth Leather, the group’s senior Asia economist.

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The UK Economy, and Sterling, Face Next Big Crisis This Winter – BNN Bloomberg

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(Bloomberg) — Headwinds for the UK economy spell trouble for sterling, and the real test for the Bank of England and the currency may still be in store.

The cost-of-living crisis is about to intertwine with the energy crisis this winter, leaving the BOE in a bind. UK wholesale natural gas prices have more than tripled in the last year and are more than four times higher than the seasonal average over the previous five years. Household energy bills are forecast to rise while the government plans for organized blackouts in a worse-case scenario in January.

If the energy crisis gets out of hand, the market might expect the BOE to pivot because rates can only do so much in the face of supply-driven forces such as Russian gas supplies, inventories, and alternate energy sources that are being tested by climate change.

There is also the question of fiscal support and the uncertainty surrounding it. The BOE has forecast inflation topping 13% in coming months and a recession through 2023 as it raises rates. The central bank is an apolitical body that has no say over government fiscal policies, making whoever becomes the next prime minister that much more significant. Front-runner Liz Truss is pledging an emergency budget and more borrowing to stimulate the economy, while the competing former chancellor Rishi Sunak is advising caution while also vowing to offer more cost-of-living support.

Currency traders aren’t convinced that economic data Friday is enough to prove the economy’s resilience, which is why even as money markets are raising their BOE tightening bets, the pound is the second worst-performing G-10 currency against the dollar on the day.

But it’s fair not to read too much into the curious gross domestic product print. A small contraction was expected given the Jubilee bank holiday, but June’s drop is smaller than in comparable periods, as Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics, noted. July data will likely offer a better picture. It’s possible that numbers would either be revised lower or show that the economy has indeed been more resilient than many expect. Looking ahead, however, there aren’t many other concessions that the pound can give way to.

NOTE: Nour Al Ali writes for Bloomberg’s Markets Live. The observations are her own and not intended as investment advice. For more markets commentary, see the MLIV blog.

©2022 Bloomberg L.P.

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