Alaric Securities celebrates at Nasdaq MarketSite
March 13, 2020

Coronavirus and the Global Stock Market Shock

Alaric Securities

According to many experts, COVID-2019 will exacerbate the already expected recession. On Monday, March 9, the world was shaken by an economic shocker. After the collapse of oil quotes, the leading Asian, European and American indices collapsed, and trading in the US was suspended for 15 minutes. 

The oil prices drop led to the first since 2012 gold price increase to $1,700 per ounce. Among the causes of such shocks in the markets, experts call the coronavirus pandemic, in which more than 126 thousand people have already contracted worldwide. Of these, 4,640 people died, and 62,325 have recovered. While doctors around the world are looking for a medical solution to the problem, the business community is anxiously watching the decline in stock quotes and indices.

The world economic crisis was first discussed in the summer of last year. However, it is COVID-2019, according to many experts, that will become the catalyst aggravating the already expected recession. 

Catalyst Epicenter

China is the country, in which coronavirus was first detected, and most patients are there. The fight against the disease forces local authorities to introduce quarantine measures that adversely affect production and business activity. 

China is a significant component of the global economy. And for many companies worldwide, the production processes in China are tied to their own output. Thus, if the pandemic continues and intensifies, it is difficult to name businesses that will not suffer from the upcoming market imbalance. Electronics, engineering products, clothing, raw materials- all these and more industries will experience huge losses.

Chronicles of the Financial Fever

On February 24, the coronavirus officially reached Europe. The pandemic on the continent began with Italy; later, large outbreaks occurred in France and Germany. As of March 2, cases of infection with the COVID-19 virus were recorded in more than 60 countries, 20 of them are European.

The world’s major stock exchanges (Tokyo, Shanghai, London, Frankfurt, New York) reacted to this news with a real panic. Key stock indices (Dow Jones, NASDAQ, FTSE, DAX, Shanghai Composite, Nikkei) lost an average of 10-12% in a matter of days. Brent crude for the first time in two years fell to $50 per barrel.

According to the results of the trading day on March 9, world stock indices have fallen to record numbers since the last big crisis. Japanese NIKKEI 225 lost – 5%, British FTSE 100 – 7.7%, German DAX almost 8%. A few hours after the opening, the US market crashed by 7% of the S&P 500.

The “coronavirus” market crash was the largest in the past 12 years: the last time it happened was in 2008; a comparable collapse occurred in the early 2000s with the so-called collapse of the dot-com bubble (a large drop in the shares of technology companies).

Main Causes of the Stock Market Shock

There are actually two main causes of what’s happening in the market. Firstly, it is the fact that Russia and Saudi Arabia launched an oil price war. The result: oil prices fell by 30%, reaching $31.2 per barrel (Brent); later, the price rose to $35. Recall that at the beginning of the year, the price of oil was above $60. Investors ran to sell off shares in energy companies, primarily American ones as many of them would not survive at that price. But not only energy is under attack. Oil is the queen of commodity markets, and such a decline will lead to price adjustments in other sectors.

The fall in prices and the expected sale in the stock markets provoked a tremendous movement of assets. Investors are looking for protected instruments and they traditionally find them in American debt. The demand for US government bonds led to a decrease in their yield below 0.5% per annum, this is another record.

The spread of coronavirus leads to ever greater problems in the economy. According to analysts at Bank of America, the current year will be the worst for the global economy since the global economic crisis ended in 2009. They expect the world economic growth rate to fall to 2.8% by the end of the year. 

The slowdown in the Chinese economy due to the outbreak of coronavirus will lead to this in the first place. The OECD estimated the impact of coronavirus at 0.5% of global GDP. The virus is already in more than 100 countries in the world. And even countries with well-developed medicine cannot stop its spread.