On 7 January 2020, the World Health Organisation (WHO) identified the root cause of an influenza-like outbreak in the city of Wuhan, China. Referred to as the novel coronavirus (COVID-19), the highly contagious disease spread rapidly despite quarantines of affected cities and travel restrictions. By 10 March 2020, COVID-19 moved through more than 110 countries, resulting in approximately 113,702 confirmed cases and 4,012 fatalities.
The economic fallout from COVID-19 was devastating. The disruption to international trade and commerce placed immense pressure upon the world's capital markets. Subsequently, equities products struggled to find solid ground, safe-haven assets rallied and forex currency pairs experienced swift revaluations. Although 93% of confirmed cases could be attributed to just four countries (China, Italy, Republic of Korea and Iran), the impact of COVID-19 caused financial panic from Asia to New York.
Delayed Reaction To The COVID-19 Outbreak
The COVID-19 outbreak can be traced back to late December 2019, but it did not become a primary market driver until the end of February 2020. Below are important periods on the early novel coronavirus timeline (31 December 2019 to 21 February 2020):
- 31 December 2019: China alerted the WHO of multiple cases of an unknown virus causing pneumonia in the city of Wuhan.
- 7 January 2020: Officials at the WHO identified the disease as the "novel coronavirus."
- 11 January: The first death from the virus was reported in China.
- 13-17 January: The novel coronavirus extends its reach beyond China's borders, with cases being confirmed in Thailand, Japan, Nepal, France, Australia, Malaysia, Singapore, South Korea, Taiwan, Vietnam and the United States.
- 23 January: Chinese authorities placed the city of Wuhan under quarantine.
- 30 January: The WHO declares the novel coronavirus a global emergency. According to Director Tedros Adhanom Ghebreyesus, "The reason for the declaration is not because of what is happening in China but because of what is happening in other countries."
- 7 February: One of the first doctors to raise concerns over the mystery illness, Li Wenliang dies.
- 11 February: Officials at the WHO officially name the novel coronavirus "COVID-19."
- 14-20 February: Deaths attributed to COVID-19 are reported in France, Iran and South Korea.
Despite the rapid escalation of the COVID-19 contagion, the global equities markets continued to be dominated by bullish sentiment throughout January and February 2020. The "risk-on" attitude culminated with the posting of new all-time highs in the Dow Jones Industrial Average (DJIA), Standard and Poor's 500 (S&P 500), and NASDAQ 100 (NDX) during February.
Investor participation in risk assets was not confined to U.S. stocks. Leading international equities indices also fared well ahead of COVID-19 causing a full-blown market panic. During mid-February, the FTSE 100, CAC-40CAC-40 and German DAX 30 were trading with limited volatility, unshaken by growing coronavirus angst.
However, many investors did turn to the traditional safe-haven gold bullion to hedge against risks posed by COVID-19. For the six-week period from 1 January 2020 to 20 February 2020, spot gold (XAU/USD) prices rose by US$102.22 per ounce (+6.7%).
From Concern To Panic
As a general rule, financial markets are not fond of uncertainty. High degrees of uncertainty bring enhanced participation, pricing volatility and a gravitation toward safe-havens. Over the course of the COVID-19 outbreak, these elements of market behaviour prompted the repricing of most asset classes.
On the Monday, 24 February 2020 trading session, the global markets began violently pricing-in widespread fallout from the novel coronavirus. Over the previous weekend (22-23 February), COVID-19 dominated news headlines and heightened concerns over containment. Surprise reports out of Italy showed that the spread of COVID-19 was serious and threatened the entire European Union. On 23 February, the Italian Ministry of Health confirmed an "increasing" number of cases and two deaths in Northern Italy. Following the announcement, the Italian government locked down 12 towns in Lombardy and Veneto, a total of more than 50,000 citizens.
Italy's dramatic policies increased investor angst ahead of the trading week's open. For Monday, 24 February, volatility on the financial markets reached a fevered pitch:
- Led by a 1031 point loss in the DJIA, the U.S. stock indices had their worst day in more than two years.
- International equities indices felt the pressure of the novel coronavirus spreading throughout Europe. Subsequently, the FTSE 100 (-3.78%), CAC 40 (-3.94%) and DAX 30 (-4.31%) all fell dramatically.
- Safe-havens performed well as traders and investors managed their risk exposure. For the session, gold rallied to all-time highs before closing up US$15.33 per ounce (0.97%). Extreme buying hit U.S. Treasuries, which saw yields on the 10-Year Note fall to three-year lows (1.3563%). In addition, the 30-Year U.S. T-bill plunged to record lows (1.325%).
Past performance is not an indicator of future results.
Market Reaction In Feb/March 2020
For traders, the angst of February 24 was a preview of things to come. Over the next few weeks, volatility hit record levels in the global equity, commodity, currency and bond markets. Below are a few of the history-making financial events that took place as COVID-19 panic swept the globe:
- 27 February: Authorities in the state of California confirmed 33 cases of COVID-19 and were monitoring 8,400 people. The news unhinged U.S. markets, with the DJIA (-4.4%), S&P 500 (-4.4%) and NASDAQ (-4.6%) all posting massive declines. A record single session loss of 1,190.25 was realized by the DJIA.
- 28 February: Even though risk assets continued to struggle, April gold futures plunged by US$75.80 per ounce (-4.6%). This sell-off brought about gold's largest one-day loss since 2013. Spot gold followed suit, with the XAU/USD plummeting by US$58.06 (-3.53%) per ounce.
- 2 March: U.S. equities rebounded despite the growing coronavirus fears. Following muted trade in the European stock indices, the DJIA (+5.1%), S&P 500 (+4.6%) and NASDAQ (+4.5%) drove higher to significant gains.
- 3 March: In an attempt to stabilise the markets, the United States Federal Reserve (FED) instituted an emergency rate cut of ½ point. This was the first emergency rate cut since the 2008 global financial crisis.
- 9 March: Earning the previously-used moniker "Black Monday," 9 March 2020 proved to be a historic session. Following massive sell-offs in global equities and the announcement of a Saudi Arabia/Russia oil price war, the U.S. stock indices posted record single-day losses. When the dust cleared, trade on Wall Street had been temporarily halted for the first time since 1997. At the close, the DJIA ( -7.79%), S&P 500 (-7.6%) and NASDAQ (-7.29%) finished the day deep in the red. For the DJIA, session losses topped a record 2000 points.
Past performance is not an indicator of future results.
As the month of March drew on, market volatility persisted. Traders attempted to align risk and reward while investors addressed the long-term market-impact of COVID-19. Following the meltdown of 9 March, most economists and analysts agreed that a global recession was becoming unavoidable.
According to investment bank Goldman Sachs, the U.S. could see Q1 GDP growth shrink to 0.9% and Q2 growth come in at 0%. The damage abroad was expected to be more severe, with GDP growth estimated to fall from 2.9% to 1.0% year-over-year.
U.S. President Trump Contracts COVID-19
Dating back to the initial stages of the COVID-19 pandemic, several world leaders became infected with the virus. During 2020, U.K. Prime Minister Boris Johnson, the President of Brazil Jair Bolsonaro and Honduran President Juan Orlando Hernandez are a few that came down with COVID-19. Although all eventually recovered, their illnesses boosted both political and economic uncertainties substantially.
However, the financial impacts of the aforementioned cases pale in comparison to the COVID-19 infection of U.S. President Donald Trump. Following a positive test earlier in the day, President Trump confirmed his COVID-19 positive status on 1 October 2020 via Twitter:
"Tonight, @FLOTUS and I tested positive for COVID-19. We will begin our quarantine and recovery process immediately. We will get through this TOGETHER!"
Stock Markets, USD React To The News
Upon Trump's announcement going public at 12:54 AM EST on 2 October 2020, American equities futures contracts reacted violently during the U.S. overnight session:
- Dow Jones Industrial Average (DOW) futures fell by 1.6%.
- Standard & Poor's 500 (S&P 500) futures slid by 1.7%.
- NASDAQ Composite (NASDAQ) futures plunged by 2.3%.
- The USD posted immediate gains vs the euro and British pound sterling.
- Safe-haven assets rallied against the USD, with short-term traders scaling into the Swiss franc and gold.
Similar to U.S. equities futures, major international markets also closed down decisively. For the 2 October global session, the Nikkei 225 finished off 0.7%, Australia's S&P/ASX 200 lost 1.4% and the FTSE 100 dropped 1% during early trade. Angst over the health of the U.S. President brought tremendous short-term uncertainty, initially driving investors from risk assets toward safe-havens.
The timing of Trump's tweet, which fell outside of business hours on the major American stock exchanges (9:30 a.m. EST - 4 p.m. EST), led equities traders to price-in the development the next trading day. Subsequently, the Friday, 2 October 2020 U.S. trading session brought positive price action to the DOW, S&P 500, and NASDAQ. Each index managed to gain footing ahead of the weekend break, paring losses sustained in the overnight futures markets.
Trump Hospitalisation And Discharge
On 2 October 2020, President Trump was admitted to the Walter Reed Military Medical Center in Bethesda, Maryland for COVID-19 treatment. Trump's stint at Walter Reed was brief, lasting only three days. On Monday, 5 October, Trump was discharged from the facility, stating that two days previous [he] "felt great" and "better than I have in a long time."
Although the market volatility of 2 October was initially bearish toward equities, the USD/CHF and USD/XAU, perception toward Trump's COVID-19 case changed as the situation evolved. Due to Trump's age and weight, medical experts originally diagnosed his infection to be in the "high risk" category. This meant that the POTUS was subject to a greater risk of mortality, estimated to be upwards of 8.5%. While precise mortality and complication rates were debatable, the added risk was aggressively priced into the markets.
However, a series of positive progress reports from the medical staff at Walter Reed on October 3,4 and 5 reassured the markets of the President's health. The result was a strong Monday 5 October 2020 session for the American equities indices. Led by a steep rally in the NASDAQ of 2.3%, the DOW and S&P 500 posted respective 1.7% and 1.8% gains. In addition, the USD held firm vs the majors during the 5 and 6 October forex sessions as fears over Trump's well-being subsided.
The COVID-19 outbreak of 2020 brought an abundance of uncertainty to the world's capital markets. Not since the global financial crisis of 2008 had so many questions surrounded the future of commerce. Accordingly, asset classes exhibited extreme pricing volatility across the board, from commodities to currencies.
As of this writing (12 March 2020), the spread of COVID-19 and its eventual impact upon the markets is unknown. Ultimately, there is optimism that the novel coronavirus outbreak of 2020 will be successfully combated. However, an accurate timeline for a vaccine or effective containment is dependent upon a wide range of variable factors.
This article was last updated on 13th October 2020.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…