Corona and Global Stock Exchanges

On September 15th 2008, Lehman Brothers Bank fell and was the day that the world officially announced its entry into a major financial crisis, its initial indicators were about 18 months’ prior to the announcement. It was a crisis that the world has not witnessed its size since the 1929 depression. The performance of the world’s major stock exchange indexes as shown in chart no. (1), show sharp fluctuations continued with a largely downward trend until the end of 2008. With the emergence of signs of the possibility of “Corona” turning into a global epidemic after its spread from China to Iran, South Korea and Italy in Europe and then to other countries at varying degrees, there was a sharp fall in the world’s major stock indexes in the week ending on 28/02/2020. The American “Dow Jones” and the German “DAX” indexes lost about 12.4% of their value in one week; other indexes were not any better as shown in chart no. (2). In both cases, reactions of the major world stock exchange indexes were similar in the short term. But what we do not know is the path of these indicators after the “Corona” crisis in the medium to long terms, though we expect a different path, i.e. the downward path may stop after a due correction process to shares’ prices even if sharp volatility continues upward or downward.

In 2008, the crisis was much bigger because it started from crisis’ second stage, i.e. from the financial sector and the affliction of asset prices was granted. The concern then was not about its transition to the third stage, i.e. affecting the global economy’s performance, but about the extent of that effect. Despite the magnitude of that crisis versus the “Corona” crisis, the world leaders, specifically its monetary powers, being very aware of the 1929 crisis, its results and wrongfulness, using the monetary and financial policy tools efficiently coupled with the support of homogeneous political leaders then.

The current Corona crisis is much inferior but it occurred at a bad timing when the monetary policy tools and resources are greatly exhausted, with huge financial deficits accompanying a record rise of the world’s sovereign and private debts – US$ 255 trillion. It has record-high prices of financial assets – stocks – funded by cheap loans with rival political leaderships until recently.

Therefore, the repercussions of the “Corona” crisis at least in the short term were extensive and incompatible with its size because it afflicted the world when losing much of its immunity and its treatment tools. Therefore, it is unknown where the crisis will end and whether it will stop at a fundamental correction, perhaps a correction likely to asset prices. We do not exclude its likely entry into its second stage, i.e. its transfer into the financial sector. Unlike the 2008 crisis, monetary authorities will not assume absolute leadership to counter the crisis, as their tools and resources no longer allow this. The effective effort to reduce panic comes from contributions of the medical health efforts to find treatments and solutions that limit the chances of it becoming a global epidemic, and prudent political administrations capable of leading the media campaigns by disseminating real information and providing containment and treatment means, there are indications of exerted efforts are made in both directions. Medicine is working hard and some of its discoveries may succeed even if they take some time. There is political concern about the costs of transferring the crisis to the second and third stages, and that concern may lead the leaders of the largest economies in the world to cooperate once again to confront it. The main winning card of the American president in the forthcoming November elections is the continued prosperity of his economy and he will do everything possible to maintain high growth rates -2.1%- and the lowest unemployment rate -3.5%- for decades now. China is making great efforts to contain the disease and its impacts as it cannot tolerate a loss in its already low growth rates, losses of 5.6% since the end of February compared with the end of 2019. Disrupting its role as a commodity factory for the world may harm that role and its reputation in the long term. Therefore, we believe it is likely the crisis will end within the limits of the substantial and due correction of financial assets’ prices – stock prices. This may be reflected negatively on the global economy’s growth rates.