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Unless China contains coronavirus, commodity prices will remain under pressure

Ravindra Rao

Global financial markets remain in turmoil as market players continue to scan information coming in from China amid a virus outbreak which threatens to turn into a major pandemic.

China reported the outbreak of a Coronavirus in late December, however financial markets reacted sharply after Beijing last week confirmed that the virus could spread from human to human. Since there was not much clarity on intensity of the outbreak, market players started drawing parallels from the 2002-2003 SARS outbreak which killed hundreds and had a severe economic impact.

Meanwhile, the timing of the outbreak, near the Lunar New Year holiday, when large number of people move in and out of China, also led to severe market reaction.

Since then the situation has continued to worsen. China’s efforts to control the spread of the virus is yet to show effect with death toll increasing and more cases being reported in China and other countries.

China’s National Health Commission said in a statement that death toll caused by the virus outbreak stood at 106 on Tuesday, up from previous toll of 81. The number of total confirmed cases in China rose to 4,515 as of January 27, up from 2,835 reported a day earlier. Cases of infection have been reported throughout Asia and Australia, as well as in the US, France and Canada. Germany confirmed its first case. To assess the situation, the director-general of the World Health Organization is visiting Beijing.

Market nervousness about impact of the outbreak caused market players to shift from riskier assets like equities and commodities to safe havens like gold, Japanese Yen and bonds. MSCI global equity index has slumped over 2.5 percent from recent highs and stand at the lowest level since January 6. Reuters/CRB commodities index stands at 173/176, the lowest since October 2019. On other hand, gold has edged up towards $1,590 an ounce while US 10-year bond yield has slumped to October 2019 lows.

Commodities have reacted sharply as the virus outbreak is expected to affect Chinese economic activity severely unless it is contained soon. China is a major consumer for commodities and any slowdown in economic activity may affect demand.

Crude oil price has slumped to October 2019 lows amid concerns that travel restrictions may affect fuel demand. Industrial metals have fallen sharply on demand concerns with nickel testing the lowest level since July 2019. Corn, soybean and cotton prices have also fallen severely on concerns about consumer spending in China.

The general market reaction shows that market players are worried about a severe impact on Chinese economy and commodities demand, and this may not change unless there are signs that the virus spread has been contained.

(The author is VP – Head Commodity Research at Kotak Securities)

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Source: Money Control