Is the coronavirus crisis bigger than 2008 crises?

In recent times, whenever we had talked about the financial crisis, we just had one mention – ‘2008’. But now it seems that something worse than 2008 has come to ravage an already paralyzed economy. We are here talking about the pandemic “coronavirus” which has penetrated almost all the nations of the world and is frightening in its speed and breadth.

The first case of COVID-19 (Coronavirus) was reported at the end of December 2019, in the city of China, Wuhan. Due to the virus turning a global pandemic, many nations have closed their borders and gone into country lockdown to halt the spread. It leads to a great economic catastrophe which is not due to an inverse bond yields or imbalance in balance sheets, but a life-and-death struggle caused by the lung disease on the contact of the microscopic invader.

• Stock Market crashes in Pandemic Sell-Off

Coronavirus outbreak has sent the wave of financial shocks in the global stock market with major benchmark indices’ breaching their record low levels. Wall Street struggled through its worst time since the global financial crash of 2008. Europeans markets have fallen sharply with a plunge of almost 32% in London FTSE 100 since the outbreak of coronavirus. It was not only the Covid-19 but crash in oil prices that amplified the slump in the stock markets with trading at major indices breaching lower circuit filters and trading getting halted on various occasions.

Shares of airline businesses have been hard-hit as international travel ban has carved out their major source of revenue. Real estate is another important sector that has succumbed to the impact of the novel coronavirus. In 2008, the housing bubble caused the biggest drop on record with housing prices crashing by over 16 per cent. Although the picture of current scenario looks fundamentally different to 2008, experts believe that property prices in UK are expected to fall by 3 per cent in 2020 while the United States expects its home sales to fall by 35% annually this spring, which would be lowest since the start of 1991.

• Gold mimicking the price action in the stock market

Gold which is usually considered a safe haven has also joined the tumultuous ride prevailing in the stock market to follow the negative price action since the start of March 2020. Well, the fall in gold prices is attributed to the investors selling gold to cover their margin calls/losses in other parts of their portfolio. With fears of recession looming large, the market participants believe that if the economic projects continue to weaken, gold prices could breach USD 1,300 an ounce to fall back to 2015 levels.

However, following the brief fall between the up-surge, gold continues to trade in the green. On 20 March 2020, gold spot traded at USD 1,489.01, up 1.07% or USD 16.57, as at 10:00 AM GMT.

The strength in gold prices provides a stimulus to gold stocks as the companies exploring and mining gold have direct exposure to gold prices. Investors could consider gold stocks as one of the alternative investment options during the economic meltdown.

• Government’s Response on Coronavirus

Bank of England has cut interest rates to 0.1%, their all-time low level, and has increased its quantitative stimulus package by a launch of fresh £200 billion money creation scheme. The Bank made the decision at a special monetary policy committee meeting held on Thursday, 19 March 2020, following further panic in financial markets over coronavirus outbreak.

On 18 March 2020, Prime Minister Boris Johnson had talked about COVID-19 and precautionary measures that are being taken for the public. Johnson stated that the government is working to massively scale up its capacity to test the virus with the objective to become capable of hitting 25,000 tests a day. He further stated that the government would continue to initiate the right thing at the right time, in adherence to scientific advice.

UK government also assured to stand behind all small and large businesses. In the first round of economic responses to fight against the pandemic, the government had announced the package of £30 billion in its budget presented last week. On 17 March 2020, Rishi Sunak, Chancellor of the Exchequer, announced further financial support of around £330 billion loan to businesses. That means till the dust settles and the smoke clears, businesses who lack the liquidity to pay their rent, supplier, salaries, or purchase stock will have access to a government-backed loan through newly set up lending facility and loan scheme.

• Recovery in Global Market

The British Pound recovered on Friday against the Dollar, Euro and other currencies on the back of lower interest rates. Thanks to Bank of England for slashing the interest rate to lowest levels and expanding its quantitative easing package to boost the economy in the wake of minimizing the negative impact of coronavirus. The stock markets too have been on a recovery path, and since the past two trading sessions have been showing some strength.

The stabilsation of the global stock market has played another important role in driving the positive sentiments around the currency trends. As the market witnessed slight correction on Friday, the Pound-to-Dollar exchange rate rose 1.60% to reach 1.1648 while Pound-to-Euro exchange pair recovered 0.50% to reach 1.0838 on 20 March 2020.