Financial market impact of the COVID-19 pandemic

As coronavirus(Covid 19) put Europe and the United States in virtual lock down, financial economists, credit rating and country risk experts have scrambled to rearrange their assessments in light of the unprecedented geo-economic challenges posed by the crisis.

M. Nicolas Firzli, a director of the World Pensions Council (WPC) and advisory board member at the World Bank Global Infrastructure Facility, refers to it as "the greater financial crisis",[1] and says it is bringing to the surface many pent-up financial and geopolitical dysfunctions: So far, the only European countries forced to put in place short-selling bans are Italy, Spain and France: three of the four largest economies in the enfeebled European Union."

In times of acute crisis, like today, they lack cash-rich domestic buyers of last resort for the bonds and equities traded on their financial markets.

"[1]The OECD points out that businesses in many countries have become highly indebted, while the very low cost of borrowing and accommodative monetary policy has contributed to unprecedented corporate debt issuance.

[7][8] At the international and national levels, however—as Helmut Ettl, head of the Austrian financial market authority, said—there is no reliable empirical data to gauge the ongoing effects of the COVID-19 disease on the economy and the environment, as this type of crisis is unprecedented.

[9] On Monday, 24 February 2020, the Dow Jones Industrial Average and FTSE 100 dropped more than 3% as the coronavirus outbreak spread worsened substantially outside of China over the weekend.

[21] U.S. President Donald Trump signed into law an emergency appropriations and pandemic countermeasures bill, including $8.3 billion in government spending.

[25] Overall, stock markets declined by over 30% by March; implied volatilities of equities and oil have spiked to crisis levels, and credit spreads on non-investment grade debt have widened sharply as investors reduce risks.

Oil prices dipped below US$20 (Brent Crude) a barrel, losing nearly 70% in value, with storage capacity approaching its limits (OilPrice).

Meanwhile, analytics firm IHS Markit predicted a fall global demand for crude to fall by 3.8 million bpd in the first quarter of 2020, largely due to the halt to Chinese economic activity due to the virus; it also predicted the first annual reduction in demand for crude since the financial crisis of 2007–08.

Russia balked as it believed that the growth of shale oil extraction in the U.S., which was not party to any agreement with OPEC, would require continued cuts for the foreseeable future.

The breakdown in talks also resulted in a failure to extend the cut in output of 2.1 million bpd that was scheduled to expire at the end of March.

[47] On 8 March 2020, Saudi Arabia unexpectedly announced that it would instead increase production of crude oil and sell it at a discount (of $6–8 a barrel) to customers in Asia, the US and Europe, following the breakdown of negotiations.

The Washington Post characterized this as "bail[ing] out domestic oil companies", though the effect on prices was expected to be minor in a 100 million barrel per day market.

[54] In sharp contrast to US inaction, Australia announced on 22 April it would take advantage of the lowest oil prices in 21 years to build a fuel reserve by purchasing $60 million worth of crude and storing it in the US SPR.

[56] On Thursday, 9 April, OPEC, Russia and other producers tentatively agreed to the biggest oil production cuts in history.

They decided to withdraw 10 million barrels per day or 10% of global production from the market for the months of May and June, a step further supported by G20 Energy Ministers.

Analyst characterized the event as an anomaly of the closing of the May futures market coupled with the lack of available storage in that time frame.

Other oil exporters – including Mexico, Venezuela, Ecuador, and Nigeria – are expected to contract economically or struggle to manage the fiscal fallout.

Countries such as Saudi Arabia and Russia have cash reserves measured in years, but their leadership remain concerned.

The New York Times opined that this, coupled with the fall in gold futures, indicated that major investors were experiencing a cash crunch and were attempting to sell any asset they could.

[69] On 12 March, the U.S. Fed took almost unprecedented action to, in its words, "address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak".

CP most directly affects the mortgage and auto loan markets, as well as credit to small and medium-sized businesses.

[81] On 30 March, Moody's downgraded the outlook on U.S. corporate debt from 'stable' to 'negative,' focusing in particular on the global air travel, lodging and cruise ships, automobiles, oil and gas, and the banking sectors.

[84] Following passage of the U.S. Coronavirus Aid, Relief, and Economic Security Act, the Fed announced on 9 April that it would buy up to $2.3 trillion in debt from the U.S. market, including from so-called "fallen angels," companies that were downgraded from investment-grade to junk during the chaos of March.

The iShares iBoxx USD Investment Grade Corporate Bond, an exchange-traded fund with assets directly benefiting from Fed actions, grew by a third between 11 March and the end of April.

[101] In its annual review on 14 May, the Bank of Canada concluded that its three interest rate cuts in March and first ever bond buying program had succeeded in stabilizing Canadian markets.

At the same time, the uncertainty and volatility in financial markets led to a flight to safety, with investors increasingly turning to safe-haven assets such as bonds.

In addition, the downturn in the global economy and the drop in interest rates made it more difficult for businesses to access credit, leading to a decrease in corporate bond issuance.

[108][109][110] In early December 2021, Jerome Powell, the chairman of the Federal Reserve, testified before the U.S. Senate Committee on Banking that "The recent rise in COVID-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation.