Impact of Covid-19 over financial markets and real estate

By Tomasz Wisniewski|

Published: October 04 2021, 13:29 GMT+0

Impact of Covid-19 over financial markets and real estate

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Covid-19 is a global health shock like no other we have experienced throughout the past few decades. This unprecedented pandemic has made it different from previous financial and economic crises like the GFC or the Great Recession. The virus caused severe damage to the economy and individuals’ health, causing financial market stress not seen since the GFC. While Congress and the Federal Reserve were quick to respond, the U.S. and global economies have not fully recovered from Covid hit, even after a year has passed. The magnitude and impact of the intervention, regardless of where it came from, is undoubtedly unprecedented. This will have a profound effect on economics and finance research for many years.

Many financial markets were disrupted by the effects of the COVID-19 crises on households and firms. In March 2020, even the U.S. Treasury Market showed signs of stress. Acute stress was also felt in the money market funds and corporate bond markets. Importantly, the financial markets recovered quickly. We decided to illustrate everything that happened to financial and real estate markets during the first hit of Covid-19, in the middle of the pandemic and initial recovery in the infographic provided below. 

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First hit of Covid-19

First, equity markets appear to have considered the economic implications of the virus. The Covid-19 crisis caused one of the worst recessions in recent history, which saw global growth shrink by 3.6% last year. Furthermore, the GWP (Gross World Product) has decreased from 87.734 trillion USD in 2019 to 84,537 trillion USD in 2020. 

Investors began selling everything, which meant not only the stocks but the Treasuries, as well. This was bad news for the economy because it caused interest rates to rise, which is exactly what businesses feared. The governments increased spending and thus the national debts were spiking in 2020 almost everywhere. The global debt in 2020 was 255 trillion USD, which was up by 12.25% from $255 trillion in 2019. The perverse movements in bond yields and bond prices were not the only things that were troubling. One market participant correctly stated that the largest financial market in the world was “just not working” anymore.

The trillion-dollar Treasury Market, which is the base of all operating financial trades, was in turmoil. Prices moved erratically on the terminal screens. Oder, worse, prices were not even displayed at all. There was no buyer in the market that you could always count on. JP Morgan reported on March 13 that instead of a market depth of hundreds and millions of dollars in U.S. Treasuries it was possible to trade no more than $12,000,000 without noticing a price change.

Apart from the financial sectors, the global economy took an enormous hit which was also expressed in the alarmingly increasing unemployment rate. People began to lose jobs due to stopped business operations, closed entertainment centers, and budget-related reductions at companies in almost every country worldwide. If in 2019, the number of people unemployed accounted 413 million globally, it has jumped up by 31.7% in 2020 to 544 people unemployed. 

Overview of Individual Markets 

Stock Market

One of the few positive insights that we can get into Covid impacts on financial markets is the increasing popularity of trading. Interestingly, the number of first-time traders in 2020 has reached 400,000 people, which is a whole 38.46% increase since 2019’s 288,800 first-timers on market. Hence, it is not surprising that the average daily volume traded on equities market in 2020 has gained 55.7% over the previous year’s data amounting to 10.9 billion on a daily basis. The increasing popularity can be explained the free time that a lot of people got during the lockdown at home considering various methods to get themselves busy and found investment as a brilliant way to generate passive income thanks to their new trading lifestyle

While the increasing popularity of stock trading is not a bad news at all, the stock market itself kept shifting from disastrous to miraculous days. The Dow Jones Industrial Average and FTSE 100 fell more than 3% on Monday, February 24, 2020, as the coronavirus epidemic spread further outside of China. After steep declines in Asia, benchmark indices have seen a sharp drop in Europe. Due to growing concerns about the coronavirus epidemic, various U.S. stock indices, including the NASDAQ-100 Index, the S&P 500 Index, and the Dow Jones Industrial Average, suffered their sharpest falls in 2008, while the Dow fell 1,191 points. This was its largest single-day decline since 2008. Stock markets around the world reported their worst single-week declines in the past eight years on February 28, 2020.

Stock markets fell by more than 30% in March. Implied volatilities of oil and equities have reached crisis levels. Despite the extensive and comprehensive financial reforms that G20 financial authorities agreed to in the post-crisis period, this heightened turmoil is still occurring in global financial markets.

Commodities market

The COVID-19 pandemic, and the associated confinement measures, caused a unprecedented contraction of economic activity and a collapsed demand for oil and other oil products. This is the largest price shock the energy market has seen since 1973’s first oil shock. Oil prices fell below US$20 per barrel (Brent Crude), losing almost 70% of their value and storage capacity nearing its limits (OilPrice). For a day or two in April, the price went into negative zone even amounting to -$37.63 USD due to lack of storage. 

Oil prices fell because of the drop in travel demand and the absence of factories activity caused by the outbreak. The International Energy Agency predicted that oil demand growth would be the lowest since 2011, in mid-February. The Organization of Petroleum Exporting Countries (OPEC), meeting to discuss a possible reduction in oil production in order to offset the decline in Chinese demand, convened mid-February. After a meeting in Vienna, 5 March 2020, the cartel reached a tentative agreement to reduce oil production by 1.5million barrels per day (bpd). This would make the production levels the lowest since the war in Iraq. Overall the global oil production went down to 92.42 barrels per day by the end of 2020 from 101.15 million barrels per day at the beginning of the year. 

Bond and debt markets

Before the coronavirus pandemic began, there was a lot of borrowing by companies with ratings below “junk”, along with the rise of leveraged loans. These loans are made to companies that have significant amounts of debt. This created vulnerability in the financial sector. This corporate debt bubble could lead to the collapse of the financial system, which could cause a worsening of the next recession. New U.S. corporate debt decreased 10% in January compared to the previous year. This could indicate that investors are more cautious. Numerous financial news outlets warned about the possible cascading effects of the coronavirus on the remaining $10 trillion of corporate debt. Investors increased the premium (or additional yield) to hold junk bonds four times more than the premium required by higher credit lenders between mid-February and March. This indicates increased risk.

Bond prices moved in the opposite direction to stock prices during the stock market crash of March 9, 2020. Bonds are considered safer than stocks. As such, confident investors will sell bonds in order to purchase stocks while cautious investors will sell stock to buy bonds. Bond desks also reported that trading many types of bonds has become more difficult, including corporate bonds and U.S. Treasury bonds.

Real Estate market

The April and May home sales dropped to their lowest levels in five years, as many homeowners were hesitant to sell after the financial and housing crisis in 2007. According to Redfin, the number of homes that were delisted in April and May increased by more than 25% compared to a year ago.

In April, new listings fell by more than 40% compared to the same period last years. The lack of new listings combined with a low inventory caused the housing supply to plummet to new levels. According to Redfin, April’s inventory of homes for sale fell 17% compared to the same period last years. 

Not to mention the real estate investors that quickly rushed to sell their holdings due to losing hope, buyers have also decreased their home-buying activities. In April, home showings per listing in America fell by more than 40% compared to the previous year. Other indicators of housing demand such as online searches, queries for agents, and offers made were also lower in April.

Forex market

The Forex market was not concerned when the Covid-19 epidemic began in 2020. It was expected that the economic impact would be minimal and the UK would be far enough away. The full impact of the Covid-19 outbreak will not be known until years later. However, it has had huge implications for global trade and the tourism, travel and hospitality industries all around the globe. As the inflation is strongly interlinked with Forex market price movements, especially with the major currency pairs, it is not surprising that as soon as Covid affected inflation rates of various countries the currency market became unprecedented volatile. 

Even the most advanced economies have been exposed to the pandemic, which has created enormous risk. Market volatility has fluctuated with the development of the virus. In general, countries with increasing cases will see their currencies weaken. Those who are able to contain the spread of the virus often get a stronger economy. The pandemic’s trajectory has been extremely reactive with many unexpected roadblocks along the way. The FX market has seen volatility increase and is now more difficult to predict.