Dow rebounds as coronavirus fears send Chinese markets plunging

The Dow Jones industrial average rebounded from Friday's 603-point rout, surging as much as 350 points Monday before scaling back. The coronavirus already is cutting off American companies from their Chinese-made parts and materials, and analysts fear the longer the outbreak persists, the harder it will be for intertwined global economies to shield themselves from the crisis.

"When you think about the airlines that have stopped flying, fuel prices, oil prices . . . we don't live in an isolated world economically anymore," said Michael Farr, president of Farr, Miller & Washington. "China is the second-largest economy in the world, and if it starts to lag, the rest of the world starts to lag." 

Chinese stock markets dropped sharply as coronavirus infections on the mainland surged past 17,200, paralleling the sell-off that wracked Wall Street last week. The benchmark Shanghai Composite Index fell more than 8% Monday, the first day of trading since the Lunar New Year break began Jan. 24, for its steepest one-day dive in four years. Many nonessential businesses have gone dark as the outbreak has grown, severely undercutting tourism and consumer spending.

China is the world's leading oil consumer. And several analysts agreed Monday that the oil market is falling prey to worst-case fears.

"It's impossible for anyone to put a hard number on this," said Greg Priddy, of Stratfor, which calls itself a geointelligence platform. "That's why everyone is so spooked." 

The tumble in oil prices is strictly about a projected decline in Chinese demand, he said, as flights are canceled, 50 million people are under quarantine, and vehicle traffic throughout the country has dwindled. Global effects of the coronavirus would not be expected to hit oil markets for another month or so, he said.

But, in China alone, consumption is expected to be cut by millions of barrels a day. Priddy said Chinese oil refineries have reportedly cut back their "run rates" by 10%, or about 2 million barrels a day.

Crude tankers are said to be facing delays in unloading at Chinese ports, he said.

"We know it's big," he said. "Is it huge?" 

Analysts expect what Priddy called a "sharp but short" decline in demand. By summer, the market should have rebounded. But that's not to say it will be robust: Oil reserves are already high, and the global economy has been slowing. Last month, before the outbreak, Saudi Arabia pushed for a million-barrel-a-day cutback in production.

"The lack of visibility vis-a-vis this situation is what is so frustrating," wrote Pavel Molchanov, an analyst with Raymond James, in an email. "As was the case last year, during the U.S.-China trade war as well as Brexit-related uncertainty, the oil market is fixating entirely on demand concerns, while ignoring the bullish things that are happening on the supply side of the equation." 

On Tuesday, a technical committee for the Organization of the Petroleum Exporting Countries is scheduled to meet in Vienna to analyze the available information. Analysts expect that it will propose further cuts to production, not to boost the price but to stave off its collapse. Russia is likely to go along for a short-duration cut, but push back if the Saudis try to extend it into the summer, Priddy said.

Still, U.S. markets clawed back Monday, with the Dow advancing 143 points, or more than 0.5%, at the markets' close. The Standard & Poor's 500 and tech-heavy Nasdaq advanced nearly 0.7 and 1.3%, respectively. European indexes also flashed green.

Those gains stood in stark contrast to Friday, when the Dow plunged 2%, wiping out January's gains. The S&P 500 lost 1.8% and Nasdaq shed 1.6%. The declines came as the World Health Organization declared a public health emergency, and Delta Air Lines and American Airlines joined other major carriers in suspending all service to China.

"We don't know how long this will last, but history would suggest that you have short-term concerns and then the markets get over it within a three- to-six month period," said Wayne Wicker, chief investment officer at Vantagepoint Investment Advisers. "And I think that's what you're seeing this morning in the markets." 

U.S. factory activity, after contracting for five months, unexpectedly rebounded in January, Wicker noted. Add in strong first-quarter results from companies that have already reported, and the markets started the week on a high note.

Farr was less optimistic. On Sunday, China's central bank said it would inject 1.2 trillion yuan, or roughly $173 billion, worth of liquidity into the markets - a move that Farr said helped alleviate short-term anxiety.

But it won't resolve the most pressing question on when global effects will end.

"As conditions return to normal, as this disease is brought into check, things can turn around - everyone is focused on that," Farr said. "What they're missing is how long that could take." 

Also Monday, Allianz chief economic adviser Mohamed El-Erian warned investors against buying dips in the stock market and said the outbreak would deal a heavy blow to China's economy and global growth.

"For a long time I thought the market sentiment was so strong that we could overcome a mounting list of economic uncertainty," El-Erian said on CNBC. "But the coronavirus is different. It is big. It's going to paralyze China. It's going to cascade throughout the global economy." 

Shares of Carnival, the cruise ship and tour company, were down 1.7% Monday afternoon after the company confirmed that a recent passenger had the virus. 

Before the outbreak, which has spread to 23 countries outside China, economists had expected global manufacturing to pick up at the beginning of 2020, in part due to the recent trade deal between Washington and Beijing.

But the outbreak is sending jolts through the supply chains on which American companies are so reliant. From consumer electronics to automobiles to medications, China is a major economic engine where production could grind to a halt until the public health crisis is under control.

So far, the White House has downplayed the threat. Trump's top economic aide, Larry Kudlow, said last week that he expects the virus to have "no material impact" on the U.S. economy.

Many economic analyses point to the limited repercussions of the 2003 SARS epidemic. At the time, the Chinese economy bounced back relatively quickly when consumer spending returned to normal and businesses reopened. But China's $14 trillion economy is four times as large as it was then and much more entrenched in global trade.

About 150 million Chinese business executives and tourists took an international flight in 2018, the most recent data available, more than seven times the 2003 figure, according to JPMorgan. Globally, the number of shipping containers moving among the world's ports has almost tripled, according to the United Nations.