COVID-19 outbreak fears spark sharp market selloff

Whether you call it a crash or correction, world stock markets fell heavily last week as uncertainty about how the COVID-19 coronavirus will slow economic growth shook investors.

Commodity markets also fell as analysts tried to figure out how actions taken to reduce the spread of the virus, such as quarantines and travel restrictions, will slow demand for fuel, raw materials and agricultural goods.

As they often do, lots of investors ducked the volatility and headed for safe havens such as United States treasury bills.

Those advising calm noted that stock markets had been on a tear for the past 14 months and a correction was coming eventually no matter what the cause.

You might remember that stock markets nose-dived in late 2018 as analysts opined that the stimulative effects of the tax cuts initiated by U.S. President Donald Trump had run their course and that the strong run of economic recovery and growth since the recession of 2009 could not last forever.

But there was life in the economy yet and by July stock markets had climbed back to the highs set in 2018 and started a steady record of setting new all-time highs.

That lasted until about Valentine’s Day and then news of worsening spread in China of COVID-19 started the downturn. Then last week word of COVID-19 outbreaks in South Korea, Italy, Iran and other countries accelerated the crash or correction depending on your level of panic.

As markets closed out February, the Dow Jones Industrial and the Standard and Poor’s were down about 15 percent from their recent record highs. The S&P/TSX Composite in Canada was down 10 percent from its recent high.

As for agricultural commodity prices, the virus spread has knocked values down lower than where they were expected to be in this first quarter of the year.

Health authorities say it is almost certain the virus will spread in the weeks and months ahead but no one knows whether there will continue to be only a few cases popping up here and there or a great spread across large populations.

The number of people globally who have died from the disease is still tiny, 2,800 as of Feb. 28, whereas hundreds of thousands of people die annually from the regular flu and many millions die from cardiovascular diseases and cancer.

But COVID-19 appears to have the ability to spread quickly and although most healthy people survive the disease, its overall mortality rate of 10 to 20 deaths per 1,000 is more deadly than the flu, which in the U.S. is about one death per 1,000.

This potentially higher mortality rate, the fear of the disease overwhelming the medical system and the fact there is no vaccine yet nor any effective antiviral drugs identified, increases the likelihood that governments will react with quarantines, travel restrictions, school closures and cancellations of public events.

So much is unknown, but if we are lucky and containment measures work, most of the virus spread will be limited until the weather warms in the Northern Hemisphere, bringing with it the end to virus season.

If that is the case, then the issues that we have talked about before could again be the market movers in crop and livestock prices.

Those issues include:

  • The continuing tight pork supply in China because of African swine fever.
  • The U.S.-China trade deal that is supposed to increase imports of American crops and meat.
  • The palm oil production slowdown.
  • A record large soybean harvest in South America.
  • Reduced canola production in Europe.
  • Spring weather in North America when farmers will have double duty combining unharvested crops from last year and planting the 2020 spring crop.

In Canada, a further market issue will be whether railway blockades will continue to disrupt freight movement.

These issues were considered when the U.S. Department of Agriculture issued its 2020 market outlook report on Feb. 21, and once all was said and done the picture it painted was for price averages in 2020-21 that are not wildly different than 2019-20.

It forecast a season average price for all wheat at US$4.90 per bushel, up from $4.55 in 2019-20 but down from $5.16 in the previous year.

It pegged corn at $3.60 per bu., down from $3.85 in 2019-20 and about the same as the $3.61 set in 2018-29.

It sees soybeans at $8.80, up slightly from $8.75 in the current crop year and up from $8.48 in the previous year.

Soy oil was pegged at 33 cents per pound, down slightly from 33.5 in the current year and up from 28.3 in the previous year.

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