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Ebooks on Coronavirus

What Effect Does the Coronavirus Have on the Financial Markets?

While the situation was completely different just a couple of months ago, the ongoing COVID-19 Pandemic has now undoubtedly taken the whole world by storm, and the worst might be yet to come. Many countries weren’t hit by the pandemic for quite a time after the initial outbreaks in Asia, but now, everyone is on the frontline.

In most countries, the virus has dramatically altered the way people live their daily lives. Those who can are urged to work from home, and, in many places, public transportation has been suspended or at least significantly reduced. People are encouraged or sometimes forced to self-isolate. Trade, both domestic and international, has slowed down. These are only some of the changes, and each of them has its own effect, which produces additional consequences.

The drastic changes in the world economy and the significant shrinking of some of the sectors have thus affected markets far and wide, and there are strong indications that these consequences will persist or get worse. In this article, we’ll take a look at a few factors and economic sectors that are driving these problems and how, noting the most consequential changes in industries and sectors.

Reductions in Manufacturing

The manufacturing sector has been significantly affected in much of the world, but especially so in China. After the new strain of coronavirus was first identified, and the outbreak began, the containment efforts in China required drastic measures. These measures were significantly more drastic than in much of the world. While the measures have given China great results in containment efforts, they have undoubtedly put a strain on many sectors of its economy.

Many plants and factories had to be shut down or reduced to working at minimum capacity as workers had to be quarantined and isolated. China, as the manufacturing world capital that it is meant these shutdowns have affected many other economies. Even the biggest tech companies like Apple have had their supply disrupted amid these shortages. Not only does this produce short-term issues, but the potential for even worse situations concerning the pandemic presents these companies with a lot of uncertainty for the near future. Of course, all of this inevitably affects financial markets as well.

Factories in China have already been slower to resume full operation than was initially expected. The outbreak in China and the measures to counter the spread have been particularly intense, leading to more problems than anybody anticipated. The Chinese authorities are thus expectedly exercising due caution while gradually putting sections of their economy back into the business. With that said, the situation still remains somewhat unpredictable, with some experts referring to scenarios where the second wave of outbreaks might hit China.

The fears of additional waves are still fairly low, though, and so the effects of such fears on financial markets are fairly negligible for the time being. Countries all over the world are now much more familiar with the virus, and virtually the whole world has introduced measures to keep such scenarios from happening. As the pandemic grinds to a halt in China, though, more and more factories can be expected to come back to full capacity in the short term.

The Shrinking Services Sector

Quarantine and self-isolation measures have considerably impacted the service sectors of many countries. Even without being told or forced to isolate, many people are making their own choices to reduce interactions with others. Still, most countries have gone well beyond just recommending to their citizens to stay indoors or practice social distancing at least. Indeed, countries where it might have been unthinkable just one month before, such as France, are imposing severe movement restrictions.

Retail stores, restaurants, cafes, and many other small businesses have been struggling immensely because of this. On the other hand, many such establishments belong to major chains and franchises, and these corporations’ stocks are a major factor in the market. Governments all over the world have been introducing measures to help small business owners through the crisis, but how major chains and their stocks will cope with it remains to be seen.

It’s worth noting that some of these major corporations have become very important for the economy. Walmart, for instance, is the largest employer in the US, and its business might end up significantly affected in the long term. Before the crisis entered this current stage where people are going into isolation, though, retail stores and other similar establishments actually experienced a boom in business due to people who were stocking up on supplies in anticipation of quarantine measures. The reduction in business during these measures, however, might even things out in the long term.

Oil Prices and Other Issues

The demand for oil has been steadily decreasing as the spread of the disease began to slow down the world economy, so a gradual price decline began relatively early. With low demand, the world’s supplies of oil started to inflate, but then came the trouble with OPEC as well. Namely, disagreements between certain OPEC countries and their foreign partners have led to Saudi Arabia ramping up its production to decrease the prices even further. The issues began in early March when Russia and OPEC failed to reach a compromise concerning production cuts amid decreasing demand.

Going the opposite route, the Saudi oil industry has caused quite a ruckus in the international oil trade. Being one of the world’s top oil producers, the US, too, has been significantly affected by this activity. Talks between the US, Saudi Arabia, and Russia were underway as of late March and early April, but the kind of compromise that might be reached remains to be seen.

Another crucial component of the world economy that’s being severely hit by the pandemic is aviation. The world’s major airline companies have been struggling significantly as world leaders began imposing selective travel bans or closing the borders and shutting down airports altogether. The United States, for instance, has imposed numerous travel bans on Asian and European countries alike. In addition, countries like China have introduced stringently enforced quarantine measures for many new arrivals in certain locations in the country, keeping people under lockdown for 14 days at a time.

Of course, it’s not just the concrete measures themselves that are putting a strain on airlines. In a situation like this, many people are exercising caution and staying home unless it’s absolutely necessary for them to travel. Vacations, friendly or familial visits, and less important business trips are being suspended far and wide as people choose to avoid risk. Many governments are opting to set aside significant stimulus packages to keep their countries’ airline companies afloat, but despite this, stocks are getting unstable.

The Markets

It’s fairly obvious how all of these problems, and others, have affected financial markets and economic activity far and wide. Apart from the concrete issues facing certain industries, economic disruptions have also been driven by fear and uncertainty, as always. Just the anticipation of the pandemic was enough to disrupt financial markets as early as February, well before many Western countries started to take the outbreak seriously. The last week of February, for instance, was the worst week for markets between the 2008 crisis and that point.

As we moved into March, however, many governments and central banks began to implement or at least announce significant stimulus packages to keep the economy in check, including the United States. This led to a rebound for some markets, but it only lasted for a few days before many of the markets dipped again.

Even though the world has known about the emergence of the virus since as early as December of 2019, this information had little bearing on the world’s financial markets. It was certainly a new virus, but we didn’t know much about its nature or the way that China would try and contain it, or if these measures would be successful. As the virus began to spread beyond China’s borders, and as it became apparent that a pandemic was likely to occur, the global economy started to react. By February, it was clear that a crash was entirely possible, and it finally came during that final week of the month.

During that week, the stocks in the US lost almost 12% and $3.5 trillion for those stocks listed in the US. Beyond the US, MSCI’s world index showed a 10% drop in Europe for that week. Just like in the US, this week was the worst since 2008 for European financial markets as well. Throughout the week, European shares were down some $1.5 trillion. The situation wasn’t much different in Asia, especially in the stock markets of important Chinese economic centers like Shenzhen, Shanghai, and Hong Kong.

The uncertainty surrounding the pandemic and its effects on the economy and other facets of life has only gotten more intense since late February. In fact, March has been the most difficult month yet, even though many countries haven’t even reached their peak of the outbreak. Many economists are now predicting that the same can be said about the economic problems that are yet to come.

Past Experiences and Future Projections

Of course, this isn’t the first time we’ve had to deal with something like this. In fact, the market crashes that we’ve seen in late February, for instance, weren’t as bad as many other crashes since the Great Depression in 1929. In fact, this crash is only the fifth-worst one, with the Great Depression, the crisis of 2008, the German invasion of France in World War 2, and Black Monday all being worse.

Nonetheless, that week in February wiped out some $5 trillion in shares. The particularly problematic thing about the coronavirus pandemic, of course, is that it’s still ongoing and not entirely predictable. Government and central bank assurances have helped keep things stable considerably, but investors’ fears are naturally still present and, in some cases, growing. If the pandemic persists for long enough or a new wave of outbreaks happens, the situation could escalate in unforeseen ways.

Historically speaking, the most interesting comparisons would be those between the current pandemic and other major disease outbreaks. A study conducted by Cresset Capital of these effects on the S&P 500 Index gives us some insight into how the markets have behaved during viral outbreaks and pandemics. In the last five such outbreaks, the markets have always recovered over a period of 12 months at most. Not only did they recover, but they also marked gains at that 12-month mark when compared to the day before the crisis began. That growth varied considerably from one case to the next, but it was always there.

The pandemic is still expected to reach its peak, but things are definitely coming under control at this point. Although through fairly extreme measures, China has managed to get a firm grip on the spread of COVID-19, and, at this time, there is no reason to doubt that much of the world will be able to do the same. Unless the pandemic goes on for unforeseen lengths of time or somehow evolves in some drastic way, the markets will eventually be sorted out.

This will still be in large part thanks to certain active measures, of course, particularly those implemented by the central banks in the affected countries. The US Federal Reserve, for instance, has already reduced interest rates down to between 1% and 1.25%. Significant stimulus packages have also been proposed if the need arises. The central banks in countries like Japan and Britain are also closely watching their economies and are ready to intervene if they have to. China and the European Union are no different.

Needless to say, similar guarantees and assurances have been voiced on the global level by the IMF and the World Bank. All of these guarantees have been voiced since the first sign of trouble, but fear levels still fluctuated, as did the markets. As long as the virus doesn’t spiral out of control, just the official guarantee of help and financial safeguarding will be enough to keep things fairly stable in many cases. Still, such a positive prognosis will hold true as long as the situation remains under control and doesn’t end up being too different from previous viral outbreaks. And while there are strong indications that the markets will stabilize after a somewhat rocky period of fluctuation, nobody can really know beyond a reasonable doubt how things will progress.