Are the Fluctuations in Covid-19 Cases Affecting the Financial Markets?

At its core, the coronavirus pandemic is a human health crisis, and one that has had a huge impact across the globe.

More specifically, we’ve seen a total of 37.5 million cases recorded globally as of October 12th, with these resulting in an estimated 26.1 million recoveries and a little over one million deaths.

However, a growing number of scientists and experts are forecasting that the socio-economic impact of coronavirus could be even more pronounced, and there’s no doubt that everyone from entrepreneurs and financial traders will have begun to notice this influence during Q2 and Q3.

But are the fluctuations in Covid-19 impacting on the world’s financial markets, and if so how?

Charting the Stock Market Crash in 2020

When the S&P 500 index peaked in February 2020, the Covid-19 outbreak was largely confined to China and countries in Southeast Asia.

However, the World Health Organisation (WHO) declared coronavirus as a global pandemic on March 12th, causing huge ripples throughout the world’s financial markets and triggering a 34% decline in the S&P 500.

This type of sharp drop was also experienced by indexes such as the Dow Jones and the Nasdaq 100, while it marked the kind of extreme volatility that was last seen during the depths of the great recession in 2008.

The question that remains, of course, is why what precisely drove this precipitous market decline? After all, the declaration of the WHO didn’t necessarily mean that a high volume of global cases was certain, particularly as some experts had predicted the worldwide spread of the virus earlier during Q1.

However, we must recognise that most financial markets work on sentiment, while entities such as the foreign exchange are also impacted directly by a host of macroeconomic and geopolitical factors (we’ll touch on this a little later in the piece).

In this respect, the sharp market decline in March was precipitated by the rational anticipation of future Covid-19 cases and the global spread of the virus, as traders reacted to this likelihood and planned their orders accordingly.

What Can we Learn from this and Future Market Trends?

Although the currency market is a little more complex, various assets have been impacted by Covid-19 uncertainty and the potential for renewed cases and second waves throughout 2020.

No single fiat currency reflects this better than the US Dollar (USD), which despite remaining the world’s dominant reserve currency has continued to shelve value since the beginning of Q3.

This was triggered by a continual rise of cases in the US and the prospect of a further $2.2 trillion stimulus package, which may ultimately be passed into law as a way of helping American citizens and businesses cope with the fall-out from Covid-19.

However, the prospect of this measure is also weighing heavily on the value of the dollar, by making it less attractive to foreign investors and reducing capital inflows into the US.

Such trends are likely to continue in the near-term, particularly with a second wave of cases now being reported in Asia and fears that the previous cycle may be repeated as the virus spread throughout Europe and the Americas.

While it’s possible for investors in derivative assets such as currency to capitalise on market uncertainty and speculate on declining values, the main concern for traders is that even small and seemingly insignificant events are having a direct impact on financial market instruments.

For example, both US stock futures and European equities declined last week after President Donald Trump and his wife tested positive for coronavirus, with some shelving as much as 2% in value in less than 24-hours.

While this doesn’t necessarily impact on the long-term value of blue chip or mid-cap stock options, it may undermine investors with a short-term outlook who are trying to optimise their gains by leveraging market uncertainty.