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Infected Markets

February 24, 2020

The worsening of the Coronavirus epidemic, inside and outside of China, finally causes a stock market crash.

The prices of raw materials have undergone significant adjustments, putting exporting economies such as Brazil and Argentina at risk.

Among the risks stand out that of business in China, which was already a source of concern due to the high financial leverage they had, since before the start of the epidemic. Behind the businesses are the banks.

The interruption of supply chains affects the operation of a variety of industries ranging from pharmaceuticals to technology, in addition to those that suffer frontally from the fall in demand, such as airlines, tourism in general, maritime transport, port operators.

A globalized economy, with China as the main demander of raw materials, and a key supplier in a wide range of industries, represents a strong challenge for the world economy.

For Mexico, vulnerability lies on several fronts:

1.- Inputs from China.

2.- Export demand in the scenario of a weakening of the world economy and especially of the United States.

3.- Oil price. So far, supply control seems to be holding up the sharp drop in demand. It is unclear whether OPEC + Russia will be able to maintain discipline. A severe price adjustment would put the issue of Pemex's rating back on the table. The SHCP bought hedges at 49 dpb, but has not disclosed for how many barrels.

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