HONG KONG - Global equities markets, rattled by the coronavirus epidemic, are now getting further destabilised by human error. Monday’s dramatic 30% plunge in oil prices, plus signs of viral panic in Italy, pushed some major Asian indexes down as much as 6%, reversed a Chinese stock rally, and set off destabilising yen appreciation. The flight to safety is starting to look ominous.

After a long period of complacency about Covid-19, a move to cut risk exposure has got belatedly underway, pushing down stock values and inflating gold prices. But now monetary and political mistakes are compounding the selloff.

For example, last week’s rate cut by the U.S. Federal Reserve, intended to restore confidence, had the opposite effect. Italy’s initial inability to control the outbreak has led the government to implement an aggressive quarantine that could impact 16 million people – and raises the prospect that drastic methods that inhibit supply and demand could extend into the rest of Europe and beyond. Oil prices were bound to fall after Friday’s failure to reach an agreement on supply cuts within the Organization of the Petroleum Exporting Countries, but Saudi has now signalled for a full-fledged price war by slashing its own rates.

The question is what it will take to stop the bleeding. While cheap oil has some upsides for many large economies including Japan and India, it is also a leading indicator of softening global demand, and 30% of East Asia’s GDP comes from exports, per World Bank data.

Local currencies have also been thrown off by the Fed move. The yen, for example, has gained a whopping 10% since Feb. 20, touching 101.6 per U.S. dollar in morning trade, its strongest position since 2016. That’s terrible news for earnings at Japanese exporters, in particular carmakers like Toyota and Nissan. A weak dollar is a headache for other Asian economies too, including China.

Central banks have limited room to help. Nearly a decade of monetary expansion has reduced the returns from additional liquidity. Those already with negative rates have little room to move. Fiscal spending is way forward, but it’s not easy to paper over panic with handouts. Politicians will have to be creative, convincing and move fast.

CONTEXT NEWS

- Asian stock markets opened down sharply on March 9. Crude oil prices were also down 25% in local morning trade, after the Organization of the Petroleum Exporting Countries (OPEC) on March 6 failed to reach agreement with Russia on fresh supply cuts.

- Japan’s Topix index and Australia’s S&P/ASX 200 fell around 6 percent. The South Korean Kospi 200 lost over 4%, as did Hong Kong’s Hang Seng index. China’s CSI300 shed over 2%.

- Italy's government ordered a lockdown of large parts of the north of the country including the financial capital Milan to fight the coronavirus. The move became effective on Sunday.

(Editing by Una Galani and Katrina Hamlin)

© Reuters News 2020