Kushni Ulapane looks at the effects COVID-19 is having in key financial markets.
The COVID-19 outbreak has caused many economies to enter economic turmoil. As the effects of the virus damage many global financial markets, the United states, as well as Europe, have been faced with many challenges with regards to their stock market stability and social behaviours. Such issues have led to a lack of liquidity and increased uncertainty. However, it is clear that China’s financial markets are reacting very differently, when compared to other major economic powers.
European financial markets have underperformed since the outbreak of COVID-19. Markets have been significantly more volatile since the start of the year, making companies more reluctant to list through IPOs (initial public offering). This is demonstrated by the 83% decline in IPO issuance on European exchanges, compared to 2019 figures.
In addition, stock market indices have declined. In the Netherlands, the AEX index lost almost a third of its value within two weeks of the pandemic. On 12 March 2020, the FTSE 100 suffered the largest one-day crash since the 1987 market crash, and on 23 March 2020, the FTSE index saw its lowest value this year at 4993.89.
Nevertheless, AFME (Association for Financial Markets) has provided information showing that the markets are still operating well with evidence of liquidity ranging from very good to mixed, depending on the sector. Equity trading has increased by 94% in March 2020 to €84.9bn, which is higher that the March 2019 figure of €43.8bn. Corporate bond trading has increased 31% and FX trading has also increased by 61% in March 2020. Moreover, since 24 February 2020, settled transactions at the European Central Bank’s T2S platform have increased to an average of over 1 million per day, from last year’s average increase if 600,000 per day.
Much like in Europe, the stock market in the US has suffered as well. Between 24 February 2020 and 24 March 2020, there were 22 trading days and 18 market jumps, which has been recorded as the highest number of jumps in history with the same number of trading days. The outbreak caused the third highest volatility peak since 1900, whereas other diseases such as the 2015 Ebola epidemic and the 2003 SARS epidemic led to modest spikes, while Bird Flu and Swine Flu were barely registered as having any impact at all.
With regards to investing into the stock market, it is evident that Americans are reluctant to invest due to the lack of security and business confidence, which has resulted in the pandemic. In a March 2020 survey, over a third of adults reported that they were less likely to invest in the stock market, as a result of the pandemic, while only 12% said they were more likely to invest.
However, we have observed a modest recovery in the U.S. stock market since the decline throughout March. For example, since the Federal Reserve had reduced the pace at which they were buying government bonds, the yield of a 10-year Treasury bond has increased from its March 2020 value of 0.499%, to 0.64% by the end of April. CNBC has reported that the central bank will buy bonds at a rate of $15 million per day, from previously buying at a rate of $30 million per day. In addition to this, the Federal Reserve launched a quantitative easing programme in which they are aggressively buying up Treasury Bills in order to cushion the damage the virus has caused to the economy.
Chinese equities have been less volatile in comparison to other countries that have suffered from the outbreak, such as across Europe and the US. This can be seen by the benchmark Shanghai Index falling by around 15% between January and mid-March, which is half the 30% decline in the S&P 500 in the same period. Alistair Way, head of market equities at Aviva Investors, said that “Chinese equities have been notably resilient despite China being at the centre of virus outbreak”. Traditionally defensive sectors such as consumer staples, pharmaceutical and tech and internet have managed to maintain stability, as well as showing us a boost in gaming and e-commerce. Way has also suggested that the Coronavirus outbreak will lead to an increase in tech infrastructure investment as more people are working from home.
A study that was published in the International Journal of Environmental Research and Public Health, found that during a window of 35 trading days since 20 January 2020, China’s mean return on stocks fell by the lowest percentage out of the 21 stock markets used in the sample.
During the outbreak, China opened up its financial services sector. On 27 March 2020, Goldman Sachs and Morgan Stanley had received approval to take majority (51%) ownership stakes in Chinese security company subsidiaries, which will help aid their economy’s growth. However, this may not include the opening up of capital outflows from mainland China, thus focusing on foreign inflows instead. Bond Connect offers another route for foreign investors to gain access to the China Interbank Bond Market. This is currently not available for domestic investors, possibly limiting China’s scope for quickly improving their financial market.
It is evident that COVID-19 has had negative impacts on global financial markets and has also affected economic confidence within markets. Although a return to pre-pandemic levels does not seem close, it is likely that different countries will see vastly different rates of recovery within their financial sectors.
By Kushni Ulapane