Ido Fischman Explains The Effects of COVID-19 on the Global Financial Market (Updated)
"Several financial institutions have had to downgrade their growth projections with major companies"
As the coronavirus goes global, the world’s concern appears to go deeper than its proposed devastating effect on fatality and mortality rates. Declared a pandemic by WHO, this Wuhan-originated virus appears to be bringing the world’s economy to its knees.
While the financial markets had faced a measure of instability in the past, the outbreak only served to disrupt the economy with supply of goods and services globally. According to the IMF, the global economy had just started regaining its footing after a relatively slow growth and price slumps in the market in 2019.
Growth was projected to improve by 3.3% in 2020 based on the performance of the global financial markets. However, in the light of several uncertainties, the global economy as well as the financial markets is threatened with a standstill.
The coronavirus is at the moment, the global “most pressing threat” and it appears to be wreaking havoc all across the globe with the total financial market valuation experiencing massive lows.
As a result, several financial institutions have had to downgrade their growth projections with major companies working at salvaging the long-term effect of this outbreak.
The Coronavirus Stalls Manufacturing and Production
Since the outbreak at the beginning of the year, the world had experienced over 6,500 deaths and over 180,000 infected which had significantly resulted in the fallout of industrial processes.
Beyond this is the epicentre of the pandemic- the Hubei – which according to the OECD Interim Economic Assessment, accounted for about 4.5% of China’s production output. China had held the highest position on the global manufacturing scorecard accounting for about 20 to 28% of the global manufacturing output to its economy.
Despite several emergency responses by the country to curtail the spread of the virus and mitigate its effects, indicators had pointed out a decline in internal production activities. As such, the level of output for the Q1 2020 seems to be approaching a lower level.
Furthermore, China’s production output labouring under the strain of this pandemic stirred a chain of reactions globally. Given China’s major role in production of intermediate groups and demand for goods, major businesses and industrial sectors are experiencing severe adverse demand and supply shock since 2015.
The impact of this major fallout is not left out for small businesses and has led to plunges in equities and indices globally. As a result, financial institutions are being forced to reduce their target for the stock of manufacturing companies in the face of extreme volatility.
Morgan Stanley, for instance, had had to reduce target for Tesla stock following a 45% crash from its all-time surge earlier in the year. Manufacturing delays in Shanghai gigafactory had been linked to this crash.
Though the company had planned an expansion of its gigafactory plans to the US and major supplies, the spread of the virus to other parts of the world had impacted delivery. Other casualties of this outbreak are Foxconn, Apple’s manufacturing partner as well as Hyundai due to limited production parts.
Crippling Travel Services
As the coronavirus weighs heavily on human suffering, containment policies enacted are also cutting through the travel industries, with cruise lines, air travel as well as immigration heavily impacted.
In the wake of the travel ban issued to several nations by the US, the administration recently included Ireland and the U.K. to mitigate the spread of the virus. Globally, cruise line and airline trips are being halted to accommodate the sudden decline in bookings and curtail the spread.
As expected, these fallouts have resulted in sharp slumps in the global travel markets and the worst stock crash since 2008. British Airways had cancelled about 75% of its flights due to the decline in air tickets bookings.
Consequently, the company had experienced a plunge of about 24% with its employees faced with the threat of being laid off to manage the financial constraints placed on it. Due to the spread of the disease, the cruise line industry appears to be under intense scrutiny.
The Diamond Princess Cruise ship had been quarantined and discovered with about 700 passengers on board infected. In response to containment measures, Carnival Corp. had suspended its Princess cruises operations resulting in a 31.2% plunge of its stock.
Subsequently, the confidence of the travel industry that had stemmed from massive profits over the years appears to be cracking under the influence of the suspension of services.
The European Markets Dip Low under Intense Pressure
Beyond the Asian markets, the European financial market appears to be at the top of the hit list for massive price slumps in the face of the coronavirus crisis.
In response to the Trump administration’s travel ban on 26 European countries, the European markets posted the lowest dip since the beginning of the year. the US president had cited the weak containment measures employed by the European nations as a reason for its restrictions.
In addition to this, Spain’s total lockdown as well as Germany and France’s restrictions expanded the vulnerability of the European markets – making a target for price declines.
Consequently, travel and leisure stocks dipped 12.8% and the European Stoxx 600 lost 11% in lieu of its disappointing 36% dent in February. Furthermore, Italian market stock plummeted about 17% while the Germany DAX lost 12.2%.
According to reports, panic over the threats of the coronavirus had affected investors’ sentiments, increasing market volatility and putting the markets under intense pressure. In the meantime, several measures are being put into place to prevent the European economy form caving in under pressure.
The European Central Bank had announced its support for bank lending and in line with it, extended its assets purchase program by $136 billion or €120 billion. While this seems like a viable solution, in the face of the demands and supply shock, the results still remained to be seen.
The European markets further tanked due to the Central Bank’s decline of interest rates cuts in response to low consumer spending and productivity lags. The European market investors had expected 10 BP cuts.
The Bank’s response to this expectation was however to reduce its rates to improve its lending policies. This stirred up a chain of reactions, with frustrated investors banking out – thus increasing market volatility.
Asian Markets struggles to Keep Afloat Amidst Price Storms
The downside risks of the outbreak that seemed to have engulfed larger parts of the Asia-Pacific regions are reflected in the valuation of the Asian/ US markets as trade tensions appear to be more intense.
In a move that mirrored the European Central Bank’s, the U.S. Federal Reserve had launched a $700 billion quantitative easing program to improve bank lending policies. The Feds had also slashed its emergency lending rate by 125 BP to 0 – 0.25%.
Faced with highly tensed financial markets, the newly introduced Fed’s cut was a move to promote liquidity and much-needed stability to the banking sector while dealing with declines in consumer spending and flow of credit to businesses.
However, the response of the financial markets to this move had been negative. At the time of the writing, the market opened to a 1000 point decline in Dow futures and the stock price in the Australian S&P/ ASX 200 had lost 9.7% – coming out as the worst daily decline in history.
Elsewhere, Banking groups in Australia, New Zealand and China had seen extreme nosedive in prices leading. Indices were not left out. The Indian Nifty 50 took a plunge of 5.11% while Singapore’s Straits Times Index shed 4.27%.
A major pointer for this downturn remains the decline in productivity and trade. Consumer spending and demands are on the low and amidst the coronavirus remains the uncertainty stemming from the trade wars between the US and China.
Coronavirus Gone Digital?
The WHO had suggested that digital payments methods be considered globally for the containment of the virus. According to the World public health agency, the idea was proposed to reduce the spread of the virus through banknotes
Following the outbreak in January, banks in China had announced its decision to quarantine used money for 14 days and the Korean banks also followed suit. The coronavirus, according to reports, could survive for up to 3 days on external surfaces – thus increasing its reach.
The banks therefore expressed that their decision was to curtail the movement of the virus through cash or banknotes. Consequently, at the peak of this decision is the need for better means for payments while old banknotes remain in isolation.
Fortunately, global monetary policies have been made to include digital payments while proposing the improvement of existing traditional payments models. A response of the global digital payments industry has been disruption and 37% growth by 2018.
In the light of the recent economic developments caused by the outbreak, the payments system might witness an influx and abound significantly. On the flip side, the suggestions for payments and money exchange alternatives look to improve the use cases of cryptocurrencies globally.
Though still shunned by some nations, the crypto industry had begun to gain significant recognition in a way that could have brought a measure of stability to the upheavals in its market.
Prior to the outbreak of the coronavirus, the Chinese Central Bank had planned to cash in on the popularity of these digital currencies and the improvement of its monetary policies to launch its own digital currency.
However, the release had been disrupted by the chain of events that took place in lieu of the outbreak. Furthermore, a casualty of the war waged by this virus is the crypto market.
Significantly and constantly tensed especially since its not-so-gracious fall in 2017, the crypto market appears to be following the footsteps of the traditional financial markets and has caved in under pressure.
The market had spotted a massive sell-off with its total cap cut in half within 48 hours. Bitcoin’s price plummeted to below $4,000 mirroring its price at the beginning of 2018.
In a seemingly related event, the Bitcoin 2020 conference slated to occur on March 27th was postponed. Analysts believe that panic over the effect of the coronavirus on the financial markets had caused the sell-off which resulted in the downside movement.
This, though, was not an expected result especially since many believed that cryptocurrencies were the next best alternatives in the light of the stock market dips since the beginning of the year.
The unexpected crash of the Bitcoin’s price alongside the valuations of other top cryptocurrencies reinforced that the coronavirus is not taking its selected role in the downside turn of the global economy flippantly.
Domino Effect on the Global Economy
The combination of health crisis alongside uneven price slumps in the global financial markets has intensified the fears of a global recession. The bears went all out on the stock market leaving a devastating mark in its wake.
Beyond the borders of the market trials lies other pressing uncertainties that seems to be weighing on the global economy. Stemming from concerns over the spread of the disease, productivity remains stalled.
As mentioned above, the coronavirus pandemic had impeded growth and demand in several sectors especially the manufacturing and travels/ leisure industry. As a result, workers are faced with new sets of issues.
British Airways for instance had, in the face of low demands in travel tickets and stock price dip, considered laying off some of its employees.
Faced with production lags to indefinite closure of factories and units, workers across affected areas have had to go on unpaid leaves for containment.
Responsively, the world has recorded subsequent growth in unemployment rates – a feat that reflects a major drawback from the giant strides taken by economies to stay afloat. About 5million people lost their employment source within the first 2 months of the outbreak bringing up the rate of employment to 6.3%.
With the pandemic not visibly receding despite measures taken to combat it, the reactions of the global financial markets which spans for stunted growth, increased corporate debt and decline in credit quality outlines the vulnerabilities of the global economy.
In likely event, these reactions are expected to expand with lower GDP growth expected. The fallout intensified as the MLB delayed its opening season, NBA and major football leagues suspended all activities and NASCAR held its races without the adrenaline from fans.
Broadway, Disneyland theme parks, cultural parks and institutions closed off their doors to activities. Additionally, major financial derivative market, Chicago Mercantile Exchange (CME), had announced the closure of its trading floors.
The financial derivative market had cited precautionary measures as a reason for the closure of its trading ground. Other major companies affected by the precautionary measures to be taken is US-based top exchange, Coinbase, which had inculcated remote work into its policies to avoid spread of the virus at work.
Evidently, the effect of the coronavirus on the financial markets goes deeper and could plunge the world into recession.
The Silver Lining?
While the battle still rages on, the world is finally coming together to win the war. From medical interventions to innovative backups globally, coronavirus might have just found a worthy opponent.
The extremities of this virus had weighed on economies, markets and even the human faction. The Federal Reserve took drastic measures to mitigate the downside effects caused by the virus since its inception.
Citing the need for business suddenly combating irregularities in consumer habits and demand to gain access to short-term loans, the interest rates took a new turn as the Feds slashed its percentages to zero.
Companies all across are also breaking their production codes to provide the world with relief facilities for the greater good. The UK has been announced to be in talks with top vehicle manufacturing brand, JCB and other brands for the manufacturing of ventilators.
French beauty and personal care brand LVMH is switching its focus to producing hand sanitizers and disinfectant gels to curtail shortages and accommodate demands. Financial institutions are also bringing big guns to the fight.
According to the Reuters, 8-member Financial Services Forum which includes JP Morgan, the Bank of New York and Citigroup Inc. announced its plans halt its second quarter shares repurchasing in favour of the coronavirus victims.
“[…] and the largest U.S. banks have an unquestioned ability and commitment to supporting our customers, clients and the nation […]” the group highlighted in a statement.
While this decision might not seem to weigh heavily on the breaking the strain of the virus on the financial markets, the redirection of funds by these banks is set to support their customers through short-term loans and improve the state of the market.
Final Thoughts
Judging by the financial throes that had engulfed industries and economies across the world, it is evident that the effect of the new pandemic goes beyond pushing up human health devastation.
While several measures are being put in place to curtail spread and find a long-term cure, the effects of the coronavirus on the financial markets could leave the global economy struggling to find a solid ground in the long-run.
However, given the efforts of several financial bodies to stand up against the virus’ impacts, the recovery of the market might just be very close.
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