Covid-19 & the Need for the Risk Appetite
We have been running the final meters of the first half of 2020. Covid-19 outbreak has stirred up a big trouble for the humanity and it has had an appalling effect on the global markets. The financial crisis that the global markets have been going through is compared with several major crises like “the Great Depression”. One thing is for sure that it will certainly be one of the worst economic shocks that we have seen globally.
The global markets have been through several crises with low demand or scarce supply but it is thin on the ground to see no demand & no supply at the same time.
Phase-1 deal between the U.S. and China was an intensive move for the global markets but it was not enough, as the global economy has been hit with an outbreak that is called covid-19. The International Monetary Fund (IMF) has downgraded its projection for the world’s economy to 4.9%, which is more than 3% from its initial prediction in April. Latest projection of the IMF makes it easy to understand the severity of the situation. The outbreak led to lockdowns and that shut down the economies. The demand has already been on the fall for the last couple of years and the global economy had already been slowing down. The covid-19 accelerated the slowdown in the markets and its negative effect does not seem to go away so soon.
Covid-19 have given us a chance to experience the snowball effect in the markets. The lockdowns has led to a fall in the demand and stopped the production processes. Therefore, the need for the raw materials had fallen and it led to a freefall in most of the commodity prices.
It is known that most of the major central banks had already lost nearly all of their interest rate ammunition before the pandemics so that they were taken unawares. As soon as the outbreak started to spread all around the world, under the guidance of the biggest central bank, the FED, major central banks immediately used the ammunition of the interest rate that was left. But the problem over here was that the absence of the risk appetite. In other words, taking down the interest rate to zero is not enough if the markets are not open and the sense of security in the markets is called “Casper”, the ghost. Therefore, something else was needed alongside with the interest rate move. So the FED supplied liquidity worth trillions of US dollar into the markets and this limited the bottom level for the stock markets and let them recover the wounds but again it was not enough to recover the industries immediately. The need of quantitative easing (QE) policies is beyond doubt or question. Yet, QE is meaningful if the risk appetite is somewhere around.
The global markets suffered from the covid-19 throughout H1 2020 and this crisis will lead to a strong recovery afterwards. What we will be searching for in the second half of the year is the global risk appetite. However, risks like the possibility of the virus to re-emerge will not allow the recovery to be as aggressive as the pace of bottoming out. Presidential elections in the USA are also among the topics that will pump tension to the markets in the second half of 2020.
Risks will remain in the second half of 2020, but the recovery will overcome them even if it will be rough to make it. There is no question that we are in the midst of a global crisis but it is essential to remind the quote of Albert Einstein; “in the midst of every crisis, lies great opportunity.”
