How COVID-19 is Affecting Financial Markets

The world first became aware of Coronavirus on 31 December 2019, but in just three months it has spread to more than 200 countries, with nearly a million confirmed cases and 47,000 deaths. While the human cost is appalling, the long-term economic effects for potentially billions of people may yet prove to be almost as painful. This article outlines some of the effects of the virus on financial markets so far and looks ahead to what may be in store for the future.

Looking back just five weeks, everything seemed fine as global stock markets were trading near their all-time highs and investors were ignoring the spread of COVID-19 around the world. The human race is generally more optimistic than pessimistic in times of crisis, hoping and expecting that experts and governments will find solutions to even the toughest challenges, but this virus looks to be presenting the world with an unprecedented test.

The penny appeared to drop in global stock markets on Monday 24 February 2020, as investors and traders suddenly started selling. Within the next three weeks, US, UK and European stock markets fell by around 40% across the board. Although the last ten days of March saw a spectacular rebound of around 20%, today, on 2 April, this optimism has already faltered as investors see the number of COVID-19 cases and deaths rising steadily – particularly in America – and uncertainty is growing about how long this crisis may continue.

During such events, the emotions of investors and analysts swing wildly. One day the mood is optimistic and even bullish, with strong buying as investors look for a fast “V-shaped” recovery; the next day the mood switches back to shock, fear and desperation as people start to realise the potential implications of this life-changing virus. Even as stock markets were falling around 40% between 24 February and 20 March, there were several days of massive gains, including a record rise of 10% in a single day on 13 March.

Looking forward, with so many unknowns, it’s impossible to be sure how stock markets will perform in the coming months. Personally, I’m not optimistic for a fast recovery. In fact, I believe that major stock markets will hit new lows in the coming months before a sustained recovery eventually begins. Donald Trump said that he didn’t want the cure to be worse than the virus, but it’s simply not possible to relax the current restrictions on movement and social distancing until the virus is properly under control. As such, economies are going to struggle to recover under massive unemployment and corporate failures caused by the lockdowns.

In an effort to help avoid financial meltdown, Governments have slashed interest rates to zero and are pumping unprecedented amounts of money into the financial system. However, if countries are forced to shut down for several weeks or even months, then the economic effects will still be severe. Unfortunately, even this wall of money will not be sufficient to avoid deep recessions in many countries, if not a full global recession.

There are other consequences too. In Europe, tensions are building between EU countries over whether or not to issue so-called “Coronabonds”. These are effectively a new type of government bond, issued jointly by all EU nations, with mutual guarantees between countries. Spain and Italy (and ten other EU members) are keen to issue this shared debt, but Germany and The Netherlands are stubbornly refusing to play ball.

To end on a more positive note, it is heart-warming to see some of the positive and selfless acts of kindness being displayed across the world. Every day we see news of the overwhelming goodness of the human race, as millions of people volunteer to help others in any way they can. Also, evidence of social unrest has been minimal, and I really hope that this continues throughout the crisis and beyond. The planet, too, must be breathing a sigh of relief in recent weeks as the level of pollution across the world has dropped sharply. It’ll be interesting to see how peoples’ opinions are altered by this experience, although I have a feeling that normal service will be resumed as soon as possible.