Key Things We Learnt about Economies and Equity Markets Amid Crisis

  • Apr 03, 2020 AEDT
  • Team Kalkine
Key Things We Learnt about Economies and Equity Markets Amid Crisis

Go three months back in time and you will realise that you had so much to talk about the happenings in the world! But now, things are different. Whether you read newspaper, watch television or surf web, COVID-19 pandemic is the one making headlines.

At the time when the countries across the world are bearing the brunt of coronavirus crisis, economies and communities have begun to circle the wagons.  Be it central banks, governments, international organisations or other policymakers, every single authority is going great lengths to revive the economies hit by coronavirus.  

In this context, let’s make you familiar with the key things that we learned regarding coronavirus crisis in the last few days:

Coronavirus Cases Continue to Rise, US Carrying the Weight

The number of coronavirus confirmed cases has surpassed one million mark across the globe as on 3rd April 2020, with total number of deaths exceeding 50,000. In just last one month, the coronavirus confirmed cases have increased by about 975 per cent, with maximum growth recorded post mid-March 2020. The cases have doubled in a week’s time as the virus continued to tighten its hold in North America and Europe.

At present, the world’s largest economy, the US is carrying the most burden of the coronavirus crisis, with over 240,000 people diagnosed and more than 6,000 deaths. It seems unbelievable that there were just 118 coronavirus confirmed cases in the nation a month back.

Volatility Remains in Currency Market

The currency market has continued to keep investors jittery with massive fluctuations, particularly in March 2020, when the world observed a sharp surge in coronavirus confirmed cases. For instance, the US Dollar Index, recorded at 100.35 on 3rd April 2020, bottomed out to 95.07 on 9th March 2020, subsequently rising to 102.94 on 19th March 2020.

The variations in the US currency market were largely driven by initial panic buying of the US dollar, Fed’s huge $2.2 trillion stimulus package and its commitment to purchase assets, soaring demand for unemployment benefits, recession fears and Fed’s swap line agreements.

In addition to the US Dollar Index, the AUD/USD pair has also been demonstrating significant ebbs and flows for quite some time now. Have a look at the below chart representing fluctuations in AUD/USD since 21st February 2020:

           

It is worth pointing out that the RBA’s monetary policy measures, the Morrison government’s stimulus packages and variations in the US dollar and oil prices drove this volatility in the AUD/USD pair.

Oil and Gold Price Movements Grab Attention

Interesting movements have been observed in the commodities sector in the last few days, especially in gold and oil prices. After returning from their months-long downward journey, the oil prices showed some recovery today on anticipations of a price war truce between Russia and Saudi Arabia.

Moreover, the gold prices are also showing signs of recovery in the international market amidst continuing uncertainty regarding coronavirus pandemic. Owing to a significant rise in coronavirus confirmed cases, investors are increasingly turning towards safe haven assets, seeking cautious escape.

Equity Markets Hit By COVID-19 Pandemic

The first quarter of 2020 was one of the disastrous quarters for the global equity markets, with massive sell-off seen amidst coronavirus-induced fears. The quarter marked the end of Wall Street’s longest-ever bull market, wiping off trillion dollars’ worth market value from the US share market.

For the Dow Jones industrial average, the March 2020 quarter was the worst quarter since 1987 crash.

However, the index has posted gains of about 2.2 per cent on 2nd April 2020, closing the trading session at 21,413.44.

Similar to the US share market, the March quarter was a devastating one for the Australian share market. The uncertainty over the coronavirus crisis induced a sharp sell-off in the Australian equity market during the quarter, resulting in a fall of over 24 per cent in the S&P/ASX 200 .

Though the index posted modest gains early this week, it closed the trading session ~1.7 per cent down at 5067.5 points on 3rd April 2020.

Also Read Macro Catalysts Driving Volatility in the Australian Share Market

Significant Monetary Policy Actions Put in Place

In response to the COVID-19 pandemic, the US Federal Reserve lowered the federal funds rate by 150 basis points to the range of 0 to 0.25 basis points. Moreover, the Fed lowered the current cost of swap lines with key central banks and signed further swap agreements with other central banks. Besides the central bank also introduced facilities to back the flow of credit.

In addition to the Fed, the RBA also announced some major policy measures to stabilise the economic conditions in Australia. The RBA lowered the interest rate to 0.25 per cent and commenced first-ever quantitative easing program. The central bank declared to target yield on 3-yr government bonds at ~0.25 per cent by buying government bonds in the secondary market. Moreover, for SMEs lending, the bank established a term lending facility of minimum $90 million.

The RBA has so far purchased government bonds worth more than $20 billion since commencement of daily auctions on 20th March 2020.

Fiscal Policy Responses to COVID-19

To support the US households at the time of crisis, the US Senate approved the Fed’s huge economic rescue package worth USD 2.2 trillion recently. The package was announced to increase unemployment benefits, allow small businesses make payroll during their workers’ stay at home and provide direct payments to the US citizens. The US Department of Labor has recently notified that over 6.6 million unemployment insurance claims have been filed in just a week ending 28th March 2020.

Besides the US, the governments of other countries have also stepped up to support their respective economies in this challenging phase.

In Australia, the Morrison government announced massive stimulus packages to prevent the nation’s economy from heading into recession. The government has so far provided an aggregate economic support of about $320 billion, accounting for around 16.4 per cent of the nation’s GDP.

           

Besides, the Australian government committed to spend $2.4 billion to protect the vulnerable citizens from coronavirus and to strengthen the health system.

         

Although governments around the world are taking intense steps to curb the economic impacts from coronavirus pandemic, the IMF believes the success and magnitude of these policy actions will determine how fast the economies will revive after the spread of the virus is contained.

Also Read COVID-19 Pandemic: An Economic Emergency to be Dealt With


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