Economic turmoil associated with the COVID-19 pandemic has had wide-ranging and severe impacts upon financial markets, including stock, bond, and commodity (including crude oil and gold) markets. Major events included a described Russia–Saudi Arabia oil price war, which after failing to reach an OPEC+ agreement resulted in a collapse of crude oil prices and a stock market crash in March 2020. The effects upon markets are part of the COVID-19 recession and are among the many economic impacts of the pandemic.
Financial risk and country risk As the COVID-19 pandemic 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", and says it is bringing to the surface many pent-up financial and geopolitical dysfunctions:
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.
Businesses in European cohesion regions are more concerned about the pandemic's consequences. Companies in affected areas anticipate long-term effects on their supply chain from the outbreak. A bigger proportion of businesses anticipate permanent employment losses as a result of the digitalization transformation brought on by COVID-19.
Consequently, the corporate debt stands at very high levels in many G20 countries. Also, lower-rated credit issued in the form of BBB bonds, non-investment grade bonds, and leveraged loans has risen to elevated levels, the OECD warns, meaning businesses will have little choice but to reduce costs and employment to withstand insolvency pressures.
Economic activity decreased by almost 4% in the majority of sub-regions of Europe and Central Asia in 2020, which was similar to the global average of 3.2%. However, the high infection and mortality rates of the pandemic in countries in the Western Balkans, the Eastern Neighborhood, and Central and Eastern Europe meant they faced deeper recessions.
Central Asian countries are predicted to be hit the worst especially poor countries Only 4% of permanently closed businesses anticipate to return in the future, with huge differences across sectors, ranging from 3% in lodging and food services to 27% in retail commerce.
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. Companies that were already financially weak before the crisis are now further destabilized. All that is known, Ettl said, is that the crisis will be profound.
Stock market
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. This follows benchmark indices falling sharply in continental Europe after steep declines across Asia. The DAX, CAC 40, and IBEX 35 each fell by about 4%, and the FTSE MIB fell over 5%. There was a large fall in the price of oil and a large increase in the price of gold, to a 7-year high. On 27 February, due to mounting worries about the coronavirus outbreak, various U.S. stock market indices including the NASDAQ-100, the S&P 500 Index, and the Dow Jones Industrial Average posted their sharpest falls since 2008, with the Dow falling 1,191 points, its largest one-day drop since the 2008 financial crisis. On 28 February 2020, stock markets worldwide reported their largest single-week declines since the 2008 financial crisis.
Following the second week of turbulence, on 6 March, stock markets worldwide closed down (although the Dow Jones Industrial Average, NASDAQ Composite, and S&P 500 closed up on the week), while the yields on 10-year and 30-year U.S. Treasury securities fell to new record lows under 0.7% and 1.26% respectively. U.S. President Donald Trump signed into law an emergency appropriations and pandemic countermeasures bill, including $8.3 billion in government spending. After OPEC and Russia failed to agree on oil production cuts on 5 March and Saudi Arabia and Russia both announced increases in oil production on 7 March, oil prices fell by 25 percent. The role of cross-border flows of goods in the modern economy, driven by decades of falling transport costs, falling communication costs, and, until recently, falling tariffs, also had a big role to play in impacting the stock market.
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. This heightened turmoil in global financial markets is occurring despite the substantial and comprehensive financial reforms agreed by G20 financial authorities in the post-crisis era.
Week of 9 March 2020
On the morning of 9 March, the S&P 500 fell 7% in four minutes after the exchange opened, triggering a circuit breaker for the first time since the 2008 financial crisis and halting trading for 15 minutes. At the end of trading, stock markets worldwide saw massive declines (with the STOXX Europe 600 falling to more than 20% below its peak earlier in the year), with the Dow Jones Industrial Average eclipsing the previous one-day decline record on 27 February by falling 2,014 points (or 7.8%). The yield on 10-year and 30-year U.S. Treasury securities hit new record lows, with the 30-year securities falling below 1% for the first time in history.
On 12 March, Asia-Pacific stock markets closed down (with the Nikkei 225 of the Tokyo Stock Exchange also falling to more than 20% below its 52-week high), European stock markets closed down 11% (their worst one-day decline in history), while the Dow Jones Industrial Average closed down an additional 10% (eclipsing the one-day record set on 9 March), the NASDAQ Composite was down 9.4%, and the S&P 500 was down 9.5% (with the NASDAQ and S&P 500 also falling to more than 20% below their peaks), and the declines activated the trading curb at the New York Stock Exchange for the second time that week. Oil prices dropped by 8%, while the yields on 10-year and 30-year U.S. Treasury securities increased to 0.86% and 1.45% (and their yield curve finished normal). On 15 March, the Fed cut its benchmark interest rate by a full percentage point, to a target range of 0 to 0.25%. However, in response, futures on the S&P 500 and crude oil dropped on continued market worries. Almost 75% of the hedge funds suffered steep losses during this timeline.
Oil prices The COVID-19 pandemic and related confinement measures caused an unprecedented contraction in economic activity and a collapse in demand for oil and oil products. The result is one of the biggest price shocks the energy market experienced since the first oil shock of 1973. Oil prices dipped below US$20 (Brent Crude) a barrel, losing nearly 70% in value, with storage capacity approaching its limits (OilPrice).
The reduction in the demand for travel and the lack of factory activity due to the outbreak significantly impacted demand for oil, causing its price to fall. In mid-February, the International Energy Agency forecasted that oil demand growth in 2020 would be the smallest since 2011. Chinese demand slump resulted in a meeting of the Organization of Petroleum Exporting Countries (OPEC) to discuss a potential cut in production to balance the loss in demand. The cartel initially made a tentative agreement to cut oil production by 1.5 million barrels per day (bpd) following a meeting in Vienna on 5 March 2020, which would bring the production levels to the lowest it has been since the Iraq War. 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 2008 financial crisis.
However, Russia refused to cooperate with the OPEC cuts, effectively ending the agreement it has maintained with OPEC since 2016. 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. Reduced prices would also damage the U.S. shale industry by forcing prices below operating costs for many shale producers, and thus retaliate for the damage inflicted on Russian and OPEC finances. 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.
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. Prior to the announcement, the price of oil had fallen by more than 30% since the start of the year, and upon Saudi Arabia's announcement it dropped a further 30 percent, though later recovered somewhat. Brent Crude, used to price two-thirds of the world's crude oil supplies, experienced the largest drop since the 1991 Gulf War on the night of 8 March. Also, the price of West Texas Intermediate fell to its lowest level since February 2016. Fears of the Russian–Saudi Arabian oil price war caused a plunge in U.S. stocks, and have a particular impact on American producers of shale oil. On 13 March, oil prices posted their largest single-week decline since 2008.
Plans announced on 13 March 2020 by U.S. President Donald Trump that he was directing the U.S. Department of Energy to purchase oil for the U.S. Strategic Petroleum Reserve were suspended less than two weeks later when funding for the purchase was not provided by Congress. This would have allowed the purchase of up to 92 million barrels. At the time, the Reserve held 635 million barrels with a capacity of 727 million. 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.
In sharp contrast to US inaction, Australia announced on 21 April it would build a fuel reserve by purchasing $60 million worth (USD) of crude and storing it in the US SPR.
Goldman Sachs predicted on 14 March that one-third of oil and oil service companies in the U.S. would be bought by competitors or driven out of business by the low crude prices. Oil companies that filed for bankruptcy during the pandemic include Whiting Petroleum (on 1 April) and Diamond Offshore (on 27 April).
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.
In March 2021, the oil prices ascended as high as $71.38 a barrel. It was for the first time since 8 January 2020, the beginning of the COVID-19 pandemic. The oil prices climbed up after the Houthi rebels of Yemen attacked the Aramco oil facility of Saudi Arabia using missiles and drones.
Negative WTI futures (20 April 2020)