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COVID-19 Starts Infecting Global Markets… but Not Mexico

By Ricardo Guzman | Mon, 02/24/2020 - 17:22

After the World Health Organization (WHO) said COVID-19 (coronavirus) has “pandemic potential” given some cases reported in countries other than China, the first meaningful impacts from the new virus are starting to rattle the financial world.

As of Monday, Europe came under the spotlight as Italy reported more than 220 cases of infection and at least seven death. South Korea confirmed 231 new cases bringing the country’s total figure to more than 830 and expanding the threat to Asia, while Iranian health authorities confirmed that 61 citizens were infected with 12 deaths so far.

The spread of the virus, combined with the economic impact to China, are the main reasons why a growing number of companies are warning that they will not meet sales or profit targets for Q1 this year. Reduced demand for goods and services, and workplace closures in China, are also expected to keep piling pressure on the the global economy at a time when some of the world's biggest economies are on the brink of recession.

Despite global fears and a nervous business community, the impact for Mexico might not be too hard, say analysts. While the Mexican peso, though strong in recent months, may suffer as a result of the strengthening US dollar ,  this has yet to be seen.

Economists agree that the effect on Latin American growth and financial markets will be limited. So far, no cases have been reported in the region. Investors see Mexico, whose economy contracted last year for the first time in a decade, as far less exposed to China’s economic might, either via direct trade links or from falling commodities prices globally.

While investors still view the US dollar, gold and other assets like government bonds as safe havens during times of stress, commodities and currency are expected to have more changes in the next weeks with some implications for the Mexican peso.


Low vulnerability for Mexico

The New York Times reported that economists and strategists at Citi made a “Coronavirus Vulnerability Index” considering four variables: economic growth, supply chains, commodities, and external market volatility risks.

While Chile, Ecuador and Peru are the most vulnerable countries in the region, with index scores of 100, 98 and 97 respectively, Mexico was placed second bottom of the table with a score of only 27.

Citi experts estimate that for Mexico a 10 percent decline in exports to China would knock just 0.05 of a percentage point off GDP, noting that “most Latin American currencies and stocks have fallen this year, with the notable exceptions being Mexico's peso and BMV stock market, which is up 2.7 percent year to date,” the Times reported.

So far, Brazil, which received an index score of 66, is the only country whose 2020 growth forecasts have been cut by the bank's economists.


Stock markets drops felt around the world

Falling prices in Asian stock markets began a domino effect that has hit the rest of the world. In Mexico’s BMV, the IPC ended today’s session with 43,837.2 points recording a drop of 2.15 percent, while BIVA’s TSE lost 20.99 points with a 2.28 percent plunge.

In the US, the Dow plunged 1,016 points, or 3.5 percent, having its worst day in just over two years. S&P 500 also dropped 3.7 percent recording its biggest daily decline since December 2018.

Among the two countries with new cases confirmed, South Korea's Kospi index closed down nearly 3.9 percent, while Italy's main index finished trading down 5.4 percent.

The top European exchanges also ended in red, with the UK's FTSE 100 closing down 3.3 percent and recording its worst day for four years. Germany's DAX and the French CAC 40 shed 4 percent each, both having their worst drops since June 2016.

Earlier in the day, Hong Kong's Hang Seng (HSI) had dropped 1.8 percent, while China's Shanghai Composite (SHCOMP) slipped only 0.3 percent after having accumulated losses in recent days.


Gold is going up

Gold soared as much as 2.8 percent on Monday to its highest level in seven years. The commodity in which investors can find a relief during hard times did not disappoint. More increases are expected in the coming weeks.

Spot gold climbed 2.1 percent to US$1,677.24 per ounce. The session’s high of US$1,688.66 per ounce was the commodities highest value since January 2013. US gold futures for April delivery rose 1.9 percent to US$1,680.20 per ounce and US gold futures jumped 2.2 percent to US$1,684.30.


US dollar looks strong

As more investors worry about the global COVID-19 outbreak, the US dollar index reached a three-year high, making the US currency  a safe-haven for investors once again. Both, the US and US dollar-denominated assets, are considered to be shielded from the outbreak's impact.

The expected slowing of China's economic growth in 1Q2020 will hurt the US less than it will other countries, according to experts. The US economy is less reliant on trade and exports that other countries and it is looking strong in recent months, recording its longest expansion in history.

Ricardo Guzman Ricardo Guzman Editor