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COVID-19 Impact on Financial Markets

Dinesh Kumawat
Apr 04, 2020

History will remember this pandemic named COVID-19 as another world war, where the whole world was fighting against an invisible enemy. This invisible enemy has remained unbiased to every country, rippling across developed as well as developing nations. But as you all know, every country is titled as developed and developing according to their economic standings.

Introduction

We're all aware of the fact that this pandemic first culminated in Wuhan China, back in December 2019. As China battled to overcome this pandemic, markets of other major countries distanced themselves (including India) from the issue, assuming that this complication would stay restricted to China. Which is why the markets of external nations didn't face any dire fluctuations at the initial stage.

Majority markets including India and the US remained quite resilient towards the start. In fact it was even assumed by various corporations that the Indian and US companies might even benefit from it because trade and manufacturing industries were potentially shifted out of China. But what no one had anticipated was that in a matter of a few weeks these countries would also implement a full lockdown to curb the rapid eruption of the virus in their nations.

While India’s Prime Minister proclaimed a countrywide lockdown for 21 days on March 24, the US president has also undertaken steps to prevent the spread of COVID19, after thousands of cases are being reported on a daily basis.

In this blog we will mostly highlight the financial impacts of this little disease across the world. So let’s define certain areas to discuss them further. I have divided this mostly between Stock Market and Crude Oil price analysis.

Impact on Stock Market

Stock Market

What is the stock market? Or the equity market? A stock market is simply an aggregation of the buyers and sellers of the stocks (or shares). Shares represent the ownership claim on businesses.

There are generally two types of stock exchange. One is Public stock exchange which includes BSE, NSE, NASDAQ and the other is Private stock exchange which is traded only privately between private companies and investors directly.

Bombay Stock Exchange

It is the first and the largest security exchange of India. The BSE has more than 6000 companies and is one of the largest exchanges in the world, along with NYSE (New York Stock Exchange), NASDAQ, London Stock Exchange, Japan Exchange Group and Shanghai Stock Exchange. The BSE overall performance is measured by SENSEX, an index of 30 of the BSE’s largest stocks covering 12 different sectors.

Impact on SENSEX

In just a few weeks after the Coronavirus pandemic had slithered its way to impact one third of the global market, it was very well predicted that it will have an effect on the financial market of India as well. For better visualization, take a look at a chart of SENSEX with a 1 year timeline.

Photo credit - Reuters

As you can see in the above chart, it shows the extreme adverse impact the pandemic has made on the Indian stock market. Historically the Indian SENSEX market reached an all time high of 42273.87 in January, 2020 and it fell nearly 30% in the months of February and March.

As we can clearly see the maximum fall on the day before the country's prime minister announced a countrywide lock down for 21 days. According to Trading Economics Global macro models and analysts estimated it trade at on average 26635.42 in the coming 12 months.

Global Market Impact

Big shifts have been seen in the global stock markets, the FTSE, Dow Jones industrial average and Nikkei have all seen a huge downfall following the outbreak of Coronavirus. The Dow and FTSE recently saw the biggest one day downfall since 1987.

Source : Bloomberg and BBC, 1st April 2020

In response to this downfall many countries including the UK, US and India have slashed their interest rates. Which in turn will help make borrowing simple which implies that banks will be able to facilitate loans on low interest rates that will encourage spendings to boost economic growth….well at least in theory…!!!

Because of this unprecedented situation of the market we can see massive growth in unemployment claims. In this report, initial jobless claims surged more than 6.6 millions in the US alone in last week. Think about the other parts of the world, those who residing on the low wage scale or the daily wagers who have been hit especially hard during this crisis.

Impact on Crude Oil

Price of crude oil has fallen drastically since the beginning of this year primarily owing to two reasons. One is the coronavirus pandemic which literally takes billions off the stock prices of every major oil and gas company across the globe. And another is clashes between the Organizations of Petroleum Exporting Countries (OPEC) and Russia.

First when COVID-19 was discovered in China, it caused a massive economic slowdown for the world’s largest energy consumer. This decline in demand led to an over-supply of oil and gas products, resulting in fall in prices.

While OPEC decided to cut 1.5 million barrels per day from production due to fall in demand of oil products, Russia did not approve this negotiation. Then OPEC countries decided to escalate their production until Russia bends.

Source: CNBC

This chart clearly shows that on January 15, 2020 a barrel of crude oil was sold for around $60 on New York’s NASDAQ exchange and now it's trading near $20 per barrel. Oil prices have fallen more than 60% since the beginning of the year 2020.

According to this report by CNBC, two of the world’s largest oil producers Riyadh (Capital of Saudi Arabia) and Moscow (Capital of Russia) separately announced that they both would flood the market with oil in April. This would enable the fall to continue as the whole world is affected by Coronavirus pandemic, resulting in more decrease in demand.

Conclusion

The biggest threat that is looming ahead of this pandemic, is the ECONOMIC crisis. Owing to this disease's outbreak, major developing countries have endeavoured to lockdown their entire nations, leading to a massive increase in unemployment rate. Daily wagers will have not enough money to feed their families, small and medium enterprises who depend on their daily manufacturing products will run out of money, leading to more poverty and more unemployment.

There is no definitive answer for when the global economy will recover. But one thing that is clear is that this pandemic has steered the world towards the epiphany over how countries need to invest more time and resources in their public healthcare sector instead of the defence sector.

I would urge all of you to contemplate before throwing yourselves in the race again, think of the people who are more vulnerable in times like these, help them if you can, feed them, try to whatever you can or are able to.

Lastly as they say “Every cloud has a silver lining”, the world has recovered its economy from various such past crisis and this will hopefully be no exception…. Stay safe and stay home. Please like our social media page Facebook, Twitter, and LinkedIn for regular updates.

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COVID-19 Impact on Financial Markets

Introduction

Impact on Stock Market

Stock Market

Bombay Stock Exchange

Impact on SENSEX

Global Market Impact

Impact on Crude Oil

Conclusion

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