Stock Market Jitters of Second Wave and Economic Disruption

Summary

• Investors fear that second wave of the pandemic could have much severe impact
• Gloomy Outlook released by the Fed due to sudden spike in Covid-19 cases took a toll on the global markets
• The crisis is now hinting towards a U-shaped recession
• Innovation in the field of medical sciences and economic policies could help the countries climb out of recession

As countries began resuming economic activity and easing lockdowns, the global stock markets sensed some recovery in recent times after hitting lows in the mid of March. However, the investors are once again feeling the pressure and fear as a sudden spike in the number of Covid-19 cases hints towards the second wave of the pandemic. It is learnt from the history of the pandemics, that the maximum amount of carnage is caused during the second wave of the pandemic, both in terms of human cost as well as economic cost.

Impact on the US markets

The US stock markets bled once gain on Thursday, 11^th June as the United States Fed Reserve announced a dour outlook for the remaining year. The GDP of the United States is likely to shrink by 6.4 per cent in 2020, according to the United States Fed Reserve. However, the US Fed Reserve has stated that it would continue to lend support by offering stimulus packages, negligible interest rates and would continue buying debt securities.

The S&P 500 (SPX) index traded 4.48 per cent lower at 3,047.24. The Dow Jones Industrial Average Index (DJI) was down by nearly 5.3 per cent at 25,563.21. In addition, the technology benchmark index Nasdaq Composite (IXIC) was down by 3.65 per cent to 9,654.12 against its previous day close on Thursday. While the major indices in the United States traded in the red. Energy, Financial, and Industrials were the worst-hit sectors.

Impact on the UK markets

On the same day, London and European markets tanked due to apprehensions arising from the likelihood of the second wave of COVID-19 infection and bleak economic projections presented by the Federal Reserve. The London’s broader equity benchmark index - FTSE 100 closed 3.99 per cent lower at 6,076.70, the FTSE 250 index last traded 3.59 per cent lower at 16,973.67, and the FTSE All-Share Index ended 3.89 per cent lower at 3,363.63, respectively. European index STOXX 600 ended lower by 4.10 per cent, at 353.07. Energy, Telecommunications Services and Consumer Cyclicals were among the worst-hit sectors.

Impact on the Oil sector

The already battered oil industry can expect more carnage as oil process dropped significantly on Thursday as investors feared the second wave of the novel coronavirus. On Wednesday, 10^th June, the Brent crude closed above US$40 per barrel. Due to a sudden rise of coronavirus infected people in the United States and the Asia Pacific, the oil prices slipped by 7.5 per cent to US$37 per barrel on Thursday, 11^th June. The plunge in oil prices can also be attributed to increased supply of crude by the major oil producers.

The oil sector is fearing a second wave of the pandemic because the extension of travel restrictions, lockdowns and slower opening of economies is detrimental for the industry. After turning negative in April, the oil prices rallied in May due to lessened production and signs of lockdown easing. However, the fear of the second wave of the coronavirus could possibly mount pressure on those gains.

As the world prepared for easing lockdowns, the market experts earlier predicted a ‘V-shaped’ recovery from the economic impact of the Covid-19 but are now doubting it. The job redundancies, slower reopening, increasing number of Covid-19 cases in recent times, existing trade wars could pose a major hindrance to the path to recovery.

How has Covid-19 impacted the economy?

Everybody fears for the deadly pandemic. There is no clear forecast, and each country is experiencing different challenges. A steady flow of money, goods & services is essential for a healthy economy.

This flow is disrupted right now as the economic activities have reached a halt due to the coronavirus crisis. With lockdown and travel restriction imposed, people are always being asked to stay indoors. Many countries have already slipped into recession. However, it is important to figure out what kind of recession a country is in so that appropriate measures could be taken by governments to recover from it.

According to industry experts, an economic recession comes in various shock shapes. These shapes are determined by how hard a crisis hit the supply side of an economy. The inputs of an economy such as capital, machinery, software, labour, other factors of production and productivity are hit during the crisis, which eventually impacts the credit cycle in an economy. Less money is injected in the form of loans to businesses and individuals, which hampers the investment in the economy and make it more difficult for the productivity to recover.

The V-shape recession is a one-time dip. If credit continues to flow, the economy can recover to pre-crisis levels. The U-shape recession is more costly as credit supply is disrupted, and growth drops significantly. It is hard for an economy to reach its pre-crisis levels during a U-shaped recession. The L-shaped recession is the worst kind of recession that an economy can go through. The cycle of credit is disrupted not just once but perpetually with negligible investment. It is impossible for an economy during an L-shaped recession to reach its production output levels of the pre-crisis period, and the growth rate declines eventually. The L-shaped recession leaves an economy with permanent structural damages in the supply side.

However, as per industry experts, the crisis induced by the pandemic relates to uncharted territory with a ‘double risk’ of financial system shock and an epic freeze of a real economy. The households, businesses and the governments which deliver real goods & services constitute a real economy.

Countries were never prepared for this kind of double shock. Months of necessary social distancing raises this double risk, which can feed of each other in dangerous ways. A prolonged crisis could lead to bankruptcies in the real economy, making it harder for financial systems to manage. The financial system crisis in return would starve the real economy of credit which could cripple investments and growth opportunities.

In this kind of situation, the capital does not grow, pushing the economy towards a U-shaped recession. However, market experts believe that the intensity of the crisis could be lessened if not avoided and this could be done through innovation.

In the field of medical sciences, vaccines development, new treatments and capacity innovations are needed to save lives and end the economic damage caused by the novel coronavirus, while on the economic side, new policy innovations such as zero per cent interest rates loans along with credit moratoriums could help the real economy stay afloat.