HOW CORONAVIRUS HAS TRIGGERED A FINANCIAL MARKET CRISIS IN 2020?
Looking at the recent history of Financial Market Crises, none stand out more than the 2008 Financial Crash, originating within the United States Housing Market. Arguably this particular crisis was brought about by certain deregulations within the banking sector, and the over-zealous arrogance of major banking firms. This served as a large message to the banking elite and the public that deregulation and too much self-government brings dangerous levels of greed and irresponsibility. It is the purpose of banks to assist the economy and create wealth that we can then use to further stimulate the economy. What happened was credit was for all intents and purposes, ignored. Anyone would be given a mortgage, regardless of their ability to pay, and suddenly there was an unspeakable amount of debt that would never ever be paid back, causing a domino effect and subsequently beginning what we know as the 2008 Financial Market Crisis.
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The world has seen various pandemics throughout the years. However, this particular one, Corona Virus 2020, comes at a time of high levels of international travel and trade. Globalization has brought people closer and also made financial markets more interdependent. These two factors have contributed to making the Corona Virus 2020 the latest detonator of the current financial market crisis.
The Corona Virus 2020 was first detected in China, in the Hubei province in December 2019. It quickly spread to a number of other countries taking the local epidemic to a global pandemic. While the Chinese government acted relatively quickly, locking-down the population of Hubei province, western governments were more reluctant in doing so.
The hesitation was probably due to the consequences of a partial or total shut-down on economic activity. Mediatic pressure in many cases is what forced various governments into taking tough action to fight the spread of Coronavirus 2020. Of course, the consequences are in the making. Economic activity has been reduced in all the countries where the local government took unprecedented action in an attempt to stop the virus from spreading. The restriction governments have enacted have led to a large reduction of economic activity and consequentially to a financial market crisis.
Political leaders are trying to balance the need to protect lives and the need to protect economic activity. People cannot live well without jobs, yet there would be many deaths if action is not taken to prevent the spread of the virus. Some countries declared a state of emergency even with just a few deaths, such as Portugal or Taiwan, whilst others such as Sweden have decided to stay open and allow economic activity to continue. The USA is somewhere in between, while some areas like New York or California are on lock-down other parts of the country are still going about their daily business.
Where were before coronavirus caused the financial markets crisis?
The economic situation before the current financial market crisis was that of a global expansion. Some countries were racing ahead, for example, the USA, other countries although not at such a fast rate were still enjoying the benefits of economic expansion. The USA was expanding at a growth rate for GDP of 2.3%, with unemployment at decades lows of 3.5%. Clearly, the economy was beginning to heat up and analysts were reading the Fed as hinting that there may be the need of increasing interest rates soon, so as to smother an inflation spike before it happens.
In the UK also, economic activity was doing fairly well, before the onset of the financial market crisis, despite the Brexit uncertainties. GDP for the last quarter was increasing by 1.3% and unemployment was at 3.8% Both figures contributing to the FTSE 100 performance at the beginning of the year. The index was close to 7700 for the first 3 weeks of January, a level close to previous all-time highs of May 2018 above 7800. The pound had experienced a rally towards the end of 2019 where it reached a high of 1.3065 towards the end of December. That was after it had touched a recent low of 1.2025 against the US dollar in August 2019. It then managed to stay above 1.2900 for the start of 2020 as news of the Corona Virus 2020 was still fairly muted.
The Euro area was also experiencing an increase in economic activity. The last GDP data, before the Corona Virus 2020, was an expansion of 1.3% in economic activity. Unemployment had continued to fall, with the unemployment rate going from 7.7% in May 2019 to 7.4% in December 2019. The Euro currency with concerns of the effect of Brexit on the union showed no signs of a well-defined direction. The Euro against the US dollar had been in a side trend during the last 3 months of 2019, with most price action between 1.0980 and 1.1180.
The Japanese economy, after having seen negative GDP growth for the second half of 2018, had begun to show signs of expansion before any news of the Corona Virus 2020. The annualized GDP growth for December 2019 rose to 1.7%. However, the Japanese economy seemed to be stuttering with the central bank still holding interest rates in negative territory. With the asset purchasing program still running, the yen continued in a stable bear trend against the dollar. The USDJPY continued to rise throughout the second half of 2019. The pair went from a low of 104.44 in August 2019 to a recent high of 112.23 in February 2020.
The financial market crisis in 2020 deciphered - Will this lead to a global recession?
The USA has started to feel the effects of the financial market crisis which has come about in recent months due to the global spread of the Corona Virus 2020. Whether your opinion is that the government has been too relaxed in taking action, or you think the priority is keeping the economy running. The fact is the Corona Virus 2020 is taking its toll on most economies, including the US. The latest employment data showed that job creation diminished by a whopping 700,000. Non-Farm Payrolls for the March release came as a surprise. The data was expected to show a reduction in jobs of around 100,000. Many economic analysts from the USA are now seeing a likely contraction of GDP, some analysts marking that as much as a 2% decline in economic activity.
That fares comparatively well to the Euro area, which was hit earlier on and harder. Although expectations of the impact of the financial market crisis are still in unchartered territory, it’s easy to predict that economic inactivity will have consequences. Analysts of the Euro area predict sharp contractions especially for economies of Spain, France, and Italy. For the Euro area as whole analysts see the 1Q GDP contracting slightly, with more severe effects of economic shut-down in the second quarter. The Corona Virus 2020 induced economic contraction for 2020 is seen at around 6%. The EURUSD hit an unusually volatile period once the headlines started reporting the expansion of contagion and deaths throughout the globe. The Euro hit a low of 1.0778 on 20th February, to then race back up to a high of 1.1495 by 9th March. It then reversed its bullish trend to fall back to a recent low of 1.0638 on 20th March. The whipsaw price action mostly due to news of how badly the Corona Virus 2020 was affecting the economies in Europe or the USA.
The UK is also in the spotlight. The UK government has been criticized by many for its tardy response to the Corona Virus 2020 outbreak. With the prime minister in hospital, more than 73,758 contagions, and 8,958 deaths, the economy looks set to take a pounding as the cabinet will be forced to implement increasingly restrictive measures. Some analysts see the UK economy falling by as much as 15%, even more, conservative expectations still call for a decline in economic activity by as much as 13.5%. Analysts also expect unemployment to reach double figures. This would give rise to an economic crisis much worse than the 2008 crisis. A worsening of the financial market crisis is likely to set to follow as the government piles on debt to finance spending so as to prop up the economy. The FTSE 100 took a beating as news started appearing of the high rate of contagions and deaths due to the Corona Virus 2020. The index plunged 35% from 7345.5 on its open on 24th February to a recent low of 4777.7 on 23rd March.
In Japan when news of the deadly virus first hit the headlines the yen rallied against the dollar, as the yen sought its status of a safe-haven currency. As Corona Virus 2020 cases jumped in the USA the USDJPY declined from its peak of 112.23 in February to reach a low of 101.18 on 9th March. Extreme volatility then took price back up to touch 111.70 for a few days. The announcement, by the Japanese central bank, of a new stimulus package and a rising contagion count in Japan helped fuel the rally.
Watch this video: The Coronavirus Recession (10mins 02secs)
The current status of the financial market crisis and what to expect next?
Although the economy showed signs of expansion the Euro started 2020 on a bear trend against the US dollar. Before the financial market crisis, the Euro was already struggling against the dollar, taking the price from its peak at the beginning of the year at 1.1225 to a recent lo of 1.0637 by mid-March. That trend was reversed for a few weeks due to the Fed’s surprise interest rate cut. The central bank slashed rates by 0.50% to 0.00% and committed $700 billion to its asset purchasing program. The EURUSD rallied to a recent high of 1.1495 over the next three weeks, thanks mostly to the reduction in interest rate difference.
The pound took a slide down to 1.1409 by mid-March and since has managed a slight recovery. The past two weeks, however, have seen the most price action confined between a low of 1.1215 and a high of 1.2485. Restrictions are beginning to kick into place and the consequences are still to be felt. The investors are still on edge even though the FTSE recovered some ground in the last week. From the onset of the financial market crisis, the index dropped to its recent low of 4777.70 Despite the uncertainty the stock market has since recovered some ground with Friday’s close at 5876.00
Japan has been less affected by the Corona Virus 2020 and consequentially by the financial market crisis. The number of contagions at 5,347 and deaths at 88 compare relatively low to countries like the UK, Spain or Italy.
The yen is often seen as a safe haven in times of financial market crisis. Although this time the extreme volatility experienced in most financial markets has not allowed the currency to fully experience that role. After reaching a recent high of 109.38 the USDJPY spent the past week in a bear trend, reaching a recent low of 108.38
Watch this video: Coronavirus: Deploying Financial Firepower (24mins 06secs)
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