Panchanan Das
Professor of Economics
Department of Economics
University of Kolkata (financial blog on behalf of GLARiUS – www.glarius.com)
GLARiUS Markets Intelligence (www.glarius.com) provides tools, prognoses and graphs to monitor performances of economies, countries and stock markets worldwide.
The outbreak of coronavirus (COVID-19) brings about extreme uncertainty in our economic and social life by carrying a novel risk.Global financial markets have turned volatile and experienced episodic meltdowns since early March, 2020. The health crisis has been transmitted into a financial and economic crisis incurring terrible collateral damages. This crisis has caused a huge shock in the financial market. As financial markets are driven by algorithms designed by humans, individual investors behave like Keynes’s ‘beauty contest’: investors speculate on what others would speculate.
The first phase of the crisis started in early January, 2020, after the Wuhan incident in the form of pneumonia outbreak as China reported for the first time to the World Health Organization (WHO). Rational investors started to anticipate, at least partially, about the faith of the global economy as declining trend started in investment in the transportation industry during this early phase. The next phase of the crisis started after publishing the first assessment of the Wuhan incident by the WHO during third week of January 2020. The stock market started to experience the shock internationally because of the outbreak of coronavirus. The current stage started since the end week of February, 2020, when Italy declared lockdown in its most productive region. Selling in the stock markets along with buying in supermarkets jumped up significantly in Europe.
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The severity of the crisis prompted the Federal Reserve to cut down the emergency rate on March 3, 2020. The central banks in Canada, the UK, Australia, New Zealand and many other countries followed the similar move to ensure adequate liquidity. Equity markets in many countries in the developed as well as developing world suffered the worst during March 9-16, 2020. Bond yields fell sharply, most noticeably in the US where the 10- year benchmark yield fell below 1 per cent. The Dow Jones Industrial Average (DJIA) along with other prominent indices has witnessed multiple lower circuits during this time. The Indian stock indices, both Nifty and SENSEX, have also experienced a downfall of roughly 30 per cent of market capitalisation during this lower circuit. Roughly USD 650 billion has been wiped out in a single trading session during this phase. This crisis has led to a liquidity crunch in the financial system because of cut down of active workers with reduced work hour.
The effects of sharp global turbulence in the financial market transmitted into Indian financial system since March 11, 2020, following the declaration of COVID-19 as a pandemic. The Indian equity market experienced buoyancy till mid-January 2020, and recorded a sharp decline thereafter. The BSE Sensex reached above 40000 level during the third quarter of 2019-20 partly because of the fall in oil price in the global market and sizeable recovery in industrial output, but started downfall during end of the last quarter of 2019-20. Substantial sell-offs in equity markets was triggered by growing risk aversion investors. The BSE Sensex fell by 2919 points (8.2 per cent) on March 12, 2020 (shown by the red reference line in Figure). The equity market experienced a sudden fall of turnover more than 10 per cent during early trading hours on March 13, 2020, that results in breakdown of the circuit and suspension of trading for 45 minutes.
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The worst affected sector is the aviation sector experiencing nearly 20 percent downfall after the travel ban and lockdown of the Indian economy. The declaration COVID-19 virus as pandemictriggered travel bans globally. The other major affected players in Bombay stock exchange include Tata Steel, Adani Ports, Mahindra & Mahindra, HDFC Bank, Axis Bank, Reliance Industries and the State Bank of India. Foreign investors (FIIs) are continuously withdrawing money from the Indian market.
India has been in lockdown for almost 3 weeks now. A large trunk of the workforce does not earn any money or cash. The long-term (economic) effects of the pandemic are difficult to deliberate and speculate on. But the cement and foundations of the economy are being swept away at least on the short term. When the fire shall be extinguished, will there be any vegetation, any plants left? Or will bankruptcy of the economy cause large-scale economic, social unrest.
BSESENSEXIndex
avg Δ10 years +7.03% p.yearΔ1 year -16.96%
Sharpe ratio +0.13
geopolitical risk factor 8
Sharpe ratio +0.13
geopolitical risk factor 8
GLARiUS Markets Intelligence (www.glarius.com) provides tools, prognoses and graphs to monitor performances of economies, countries and stock markets worldwide.
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