Corona-Crash: Coronavirus infects the stock market

March 10, 2020

3 min read

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What's going on here?

Global financial markets plunged in their worst week since the 2008 financial crisis after a rise in the number of covid-19 or “coronavirus” cases.

What does this mean?

Back in January the markets wobbled but seemed to recover, giving the impression that investors did not consider the coronavirus a threat to markets. This has changed in recent weeks however, as the virus continues to spread at increasing rates outside of China, causing investors to worry about prolonged economic slowdown.  

On Monday 2 January the UK’s FTSE 100 share index fell 3.3%, the sharpest drop since January 2016. The UK stock market is not the only one affected by the virus, as major US stocks, like the Dow Jones, also declined at their sharpest rate since 2018. In Europe’s worst hit country, Italy, the stock market fell nearly 6%. 

In contrast however, with investors seeking to put their money into a less risky investment, gold prices recently reached their highest point in 7 years.

What's the big picture effect?

While the direct effect of the virus is on human health, the repercussions reach much further. Much of this is due to the fact that governments the world over are seeking to contain the spread of the virus, and have put strict quarantine procedures in place. The unfortunate side effect of these procedures is that many people are unable to work. The knock on effect of this can be immense. In China for example, most small businesses are yet to reopen (after closing in late January when China extended the week-long Lunar New Year into mid-February). These small and medium enterprises make up around 60% of China’s economy, and without them global supply chains are being disrupted. Further, the shut down of transport networks has prevented both the travel of workers, but also movements of raw materials needed in various industries. Primark, for example, has warned that there could be shortages of some lines as a result of delays in their Chinese factory productions due to virus related shut downs. Other retailers and builders have also reported delayed shipments from China as factories struggle to operate with so few workers.

The impact reaches further than the global supply chain as millions of people seek to avoid the contagion by cutting back on travel, shopping and eating out.  Flybe has recently gone into administration and sited coronavirus related travel implications as part of the reason. 

There are also political implications as some investors suspect that this could put an end to the longest economic expansion in America’s history. If this were the case then Donald Trump’s promise of a roaring economy as part of his re-election bid becomes more difficult to achieve.  

Law firms also will not be immune from the virus (pun intended) with some firms already asking their staff to work from home.  Some areas of work are likely to slow down, as deals may be postponed by clients until the economic climate is more stable. Those working in the employment sector will likely see an increase in work as companies and employees seek to verify their rights in the face of work closures and sick pay for those in quarantine. 

As the virus seems to be starting to take hold in Europe and other parts of the world, the worst could be yet to come. The UK government for example has suggested that school and office closures could form part of the next stage of virus response. While this would likely help to prevent the spread of the virus, it could have the dual effect of making the above discussed issues worse.  We are yet to see whether this will take effect or not, and what impact it will have.

Report written by Julie Lawford

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