Having largely ignored COVID-19, popularly known as Coronavirus, spreading across China, reactions by global financial markets came out quite strong when the outbreak spread through the Middle East, Europe and other parts of the world. COVID-19 is stoking fears of global pandemic and it’s price is being paid aggressively across major asset classes.
The fear of recession in the global economy is high even though world leaders may not want to talk about it publicly. If trade pundits are to be believed it might be considered a foregone conclusion.
Business leaders, investors and analysts globally, are drawing attention towards market signals highlighting ‘real recession’.
But, how will ‘COVID-1 recession’ occur? What is the estimated scenario of growth and recovery? Will there be a lasting structural impact from the unfolding crisis? Let’s discuss the same in little detail.
The brutal drawdown in the global financial market was reported since last week of February. The data suggest that the world economy might be on a path to recession. Valuation of safe assets spike sharply in the first week of March where long-dated US government bonds were seen falling to near record lows at -116 basis points.
Fall in asset prices triggered mechanical models of recession risk to go higher. However, the slower look to the scenario might suggest that recession should not be seen as a eventual conclusion.
1.Credit spread was pushed to rise globally, this suggests that credit markets might not be foreseeing financing problems yet. Equity valuations, on the other hand, have fallen from recent highs but they are still elevated to its long-term history.
Speaking of the opposite end of the spectrum, market volatility signalled the greatest strain implying that next-month volatility on par with major dislocations in past 30 years.
2.History shows that the recession and the red-inked/bear market must not be linked together. In cases like these, one out of three bear markets are non-recessionary. Data from the last 100 years show that bear markets do not coincide with a recession.
However, United Nations Trade Agency updated that COVID-19 might slowdown global economy by 2% costing USD 1 trillion in the year 2020.
The #coronavirus outbreak could cost the global economy up to $2 trillion this year.@UNCTAD is calling on governments to take urgent steps to reduce the economic impact. https://t.co/bFGE9SZemC #COVID19 pic.twitter.com/EUkvKzJtwb
— United Nations (@UN) March 9, 2020
The war between two oil-producing giants: Russia and Saudi Arabia is an open secret in the market.
The recent oil prices saw plummeting by more than 30% at one point to lows first time in 30 years! In the first week of March, Russia met in Vienna to discuss supply cuts that were aimed at alleviating the dramatic drop in oil demand which was caused by Coronavirus epidemic.
However, Russia did not agree to the cuts. In response to the same, Saudi oil giant Aramco announced ramping up production to more than 10 million barrels a day in April.
As a result, oil prices crashed by 20% on 9 March 2020 which was a loss not seen since 1991 during the Gulf War. Russia and Saudi might re-enter talks, results seen as the prices bounced by up by 8% on 10 March 2020.
Recent oil prices fluctuations caught the eyes of all the investors and analysts thus affecting the global economy.
In an ideal world, every central bank would confront COVID-19 challenge with interest rates changed above 5% followed by healthy inflation.
Sadly, the interest rate seen in Eurozone and Japan are reported below zero. Policy interest rates in US began under the range of 1.5-1.75%.
In recent times, nearly $400 billion were wiped off the Chinese stock market after the Chinese New Year on 25 January 2020.
Chinese currency ‘Yuan’ was seen trading at CHY7.02 against US dollar which was the lowest of the year.
Indian rupee, on the other hand, has breached to 74 against US dollar touching a 17-month low record. Other global currencies continue to witness similar volatility spectrum which might continue in April 2020 as well.
Such speculations and asymmetry are major ingredients of recipe leading to ‘Currency Wars’.
This war is introduced when divergence in monetary policy leads to sharp foreign exchange movements concluding to threats of retaliation by losers in the game.
A traditional hedge bet for market downturns was realized when gold price soared on 9th March 2020 session. Gold peaked at USD1,703.39 per ounce reaching highest level since 2013 crossing a key threshold. Gold prices remain 9% up on year-to-date as COVID-19 fears risked rise in the value.
While Coronavirus is introducing dark medical picture, there is still a concern of some cause for economic hope. However, unlike the 2008 subprime crisis, the epidemic is not initiated from the financial sector, so it might be less destabilising when there is space for a quick bounce back.
But the same can be achieved in just one way: In the direct fight against COVID-19, all countries must WORK TOGETHER!