U.S. Futures Plunge 5% as Global Recession Swats China’s Rescue Plan

The U.S. stock market is set to drop 5% at open. The gloomy pre-market data comes after analysts' stark warning on China's fiscal policy.
Posted in: Markets
Published:
March 18, 2020 9:46 AM UTC
  • The U.S. stock market is set to drop by 5% at the day’s open.
  • China will not release large stimulus packages warn analysts, unlike in 2008.
  • Global economic outlook is worsening as governments anticipate coronavirus peak to be hit in the next 2 to 3 months.

The U.S. stock market is set to drop 5% at open, as the Dow Jones Industrial Average (DJIA) futures indicate a 1,000-point drop. The gloomy pre-market data comes after analysts issued a stark warning that China will not be the savior of the global economy this time.

In contrast to the Federal Reserve and many of Europe’s central banks, the People’s Bank of China (PBoC) is taking a more conservative approach in introducing financial stimulus.

Is a worse stock market crash than 2008 incoming?

China has consistently been cautious in releasing large stimulus packages in recent years, even when the trade dispute with the U.S. worsened in 2019.

The decision of the PBoC to limit further easing of its fiscal policies come down to the focus of the nation’s policymakers on long-term economic stability.

China already has a large national debt, and the South China Morning Post estimated the country’s total debt to be around $40 trillion.

Given the large debt of China and the conservative approach of Beijing towards issuing large-scale stimulus, strategists warned that China is unlikely to issue significant stimulus packages in 2020.

Oxford Economics head of Asia Louis Kuijs said that “large-scale stimulus does not sit well” with policymakers in Beijing, noting that China will not aggressively work towards recovering the global economy.

To an already weakened U.S. stock market, the unwillingness of the world’s second largest to proactively ease business conditions and selling pressure in the global stock market is a highly negative factor for the short-term.

So far, institutions in the U.S. stock market has reacted bleakly towards China’s stance and the rapidly increasing number of coronavirus cases in Europe and the U.S.

The U.S. stock market brace for a steep decline as Dow Jones set to open below 20,000 points (source: Yahoo Finance)

Economists are predicting a global recession

As the Dow Jones is set to open below 20,000 points for the first time since May 2017, major financial institutions in the likes of Goldman Sachs and Morgan Stanley said that a global recession is inevitable at this point.

Economists at Morgan Stanley said that the strong response from the Federal Reserve will slow down the downtrend of the stock market. But, as long as the coronavirus pandemic continues to expand, the economists said that it will “shock” the global economy.

The sentiment of Morgan Stanley mirrors that of Chantico Global founder Gina Sanchez, who said on March 17 that the current stock market crash cannot be saved by monetary policies, and only through a reduction of coronavirus cases.

Governments predict 2~3 months until coronavirus peak

Stores and restaurants are shutting down in major countries like France and Italy, and regions with relatively fewer cases such as the Philippines have started to impose lock downs on a city-by-city basis.

Many governments expect the coronavirus peak to be hit in two to three months, which indicates that the panic around the pandemic may not subside until mid-2020.

Earnings of companies, especially in the U.S. and China, have taken a large hit in the first quarter of 2020. A continuation of the pandemic until June to July leaves the global economy and the stock market at risk of a much bigger downside in the medium-term.

Samburaj Das edited this article for CCN.com. If you see a breach of our Code of Ethics or Rights and Duties of the Editor or find a factual, spelling, or grammar error, please contact us.

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Joseph Young @iamjosephyoung

Financial analyst based in Seoul, South Korea. Contributing regularly to CCN and Forbes. I have covered the stock market and bitcoin since 2013.