How To Trade The Markets During Coronavirus (COVID-19)
This page is a resource for trading the financial markets during the COVID-19 global pandemic.
We’ll cover everything you, as a trader, need to know during these uncertain times, to leverage events in your favour.
What will you learn?
- How to benefit trading during a global crisis
- Tips on how to survive high volatility when trading
- How to research and what to research.
- What to avoid in the financial markets, and more.
Let’s get into it.
- How To Trade The Markets During Coronavirus (COVID-19)
- Coronavirus: A Financial Crisis In The Making (2020)
- What Does All of This Mean for Trading?
- What is COVID-19?
- Impact of the COVID-19 on Financial Instruments:
- Central Banks Actions
- Is There a Recession Coming?
- How Can We Benefit From Such Crisis?
- What Should We Avoid?
- What’s Next?
- Global COVID-19 Cases
- What Can We Learn From This Situation?
- Live Coronavirus COVID-19 Dashboard
- Latest COVID-19 Updates
Coronavirus: A Financial Crisis In The Making (2020)
The Coronavirus or COVID-19 is a global pandemic that has shaken the world and created huge market volatility throughout 2020.
With “social distancing” rules in place and full nationwide lockdowns becoming the new “norm” in many countries, this has forced a slowdown of the global economy, in-turn, prompting financial markets to crash.
Before the World Health Organization announced COVID–19 a global pandemic, many economists were looking at the threat of a worldwide recession; other economic forecasts were far more bullish on their market outlook.
What Does All of This Mean for Trading?
No matter how good your economic forecasting, it’s near impossible to “predict” unforeseen events like a global pandemic.
With market volatility at an all-time high, being a trader with skills to navigate financial markets during conditions like these can be extremely lucrative, even during a global financial crisis.
COVID-19 is the most discussed topic worldwide right now media outlets have news 24/7; all of this influences the markets, creating trading opportunities.
What is COVID-19?
COVID–19 is an extremely contagious respiratory illness caused by a new virus. Symptoms include fever, coughing, a sore throat and shortness of breath.
There is no clear explanation of how this virus emerged; all we know is that the first case appeared in December 2019, in the city of Wuhan, China. It appeared to come from a local seafood market.
What we do know, is the subsequent impact on the global financial markets and that traders and analysts have seen massive volatility in the market due to the coronavirus spread.
We are not just talking about the stock market, but Forex, Commodities and even the Bonds markets. COVID-19 has affected each market, asset by asset.
Let’s look in detail at how this virus has shaken each market.
Impact of the COVID-19 on Financial Instruments:
First, we will go over international indexes, to see how the stock markets reacted along with COVID-19
With the start of the year 2020, after China officially claimed a few cases of coronavirus, the S&P500 price began to move downward, after it reached a higher high of 3400 USD.
We can see clearly, that on 19th February 2020, the price started to drop.
The US economy slowed down since most of its production is based in China. This slowdown in output caused the drop.
Furthermore, the price broke through the 200 moving average and continue its direction sharply downward.
Another index to keep an eye on is the DAX30.
At this point, Europe is heavily affected by this virus, since Italy, Spain, and France have the highest number of deaths.
With the situation getting worse and no vaccine imminent, a significant drop displayed on DAX30.
This index reflects most European stock markets. It is evident that the DAX30 followed the same pattern as S&P500 and has dropped dramatically since mid-February.
Both the S&P 500 and the DAX30 indexes move downward, starting precisely on 19th February 2020.
A drop in the US economy leads to a decline in other smaller economies around the world.
This explains why DAX30 follows the same move as the S&P500.
We should also see what’s happening in the financial markets in the Asia/Pacific zone where this virus appeared first.
As we look at the SSE COMPOSITE index that represents China’s economy.
We see that the drop started on 14th January 2020, almost one month ahead of the S&P500 and DAX30 drop.
This downward movement is expected, as the COVID-19 began to spread across China at the end of December/early January 2020.
Here, we have combined three indices:
- S&P500 represented by candlesticks
- SSE COMPOSITE with a red chart line
- DAX30 with a blue chart line
We can see how the Chinese index started to drop at the beginning of January.
The other two indices began to fall in mid-February.
It is obvious why, because the virus emerged in China first and spread to the other countries.
To begin with, most of the currencies price reflect how healthy the country is. So, if a country is doing well, its currency appreciates, and the opposite it’s true.
So what impact has COVID-19 strongest currency in the world, the US dollar?
We observe that also on the 19th February the DXY index made a reversal and moved down from a price of 99.42 to nearly 95 USD.
This drop explains that with the spread of the virus, the US was hurt economically.
Commodities have also faced a big hit since the pandemic declared. We notice from the beginning of January the price of oil declined from 65 USD for a barrel to around 20 USD.
The lockdown of the countries led to immobility of cars, the closure of national and international flights, the limiting of internal transportation and many factories stopped operating, this has led to less demand for oil, which explains the drop.
As illustrated in the graph, the 10-year bonds rallied upward at the same date where most of the indexes fell.
Usually, investors in such critical periods run for safe instruments such as bonds. They offer periodic fixed payments.
Central Banks Actions
After COVID-19 hit the worldwide economies hard, central banks considered several actions to tackle this crisis, such as:
- Lower Interest Rate
- Stimulus Measures
- Purchase Governmental Bonds
- Reduce Requirement Ratio
The US federal reserve injected trillions of dollars in liquidity into the market to fight this economic situation. In addition, the interest rate was cut by a point, reaching 0.25% now.
Also, the fed reduced the required reserved ratio for commercial banks in a way to stimulate the economy.
Bank of China
People’s Bank of China also reduced the required reserved ratio for commercial banks, and as well it provided discounts to commercial bank’s reserve ratios to a half.
Since implementing these actions, a 550 billion yuan (79 billion USD) of liquidity has been released.
Bank of England
Bank of England started its rescue plan using a stimulus package by reducing interest rates by a half-point.
Furthermore, BOE offered cheap credit to help banks lend more money to small businesses. However, this led to a depreciation of the pound by 5.9% against the dollar.
European Central Bank
The European Central Bank tried another approach by promising to buy back the governmental bonds. It is another way of quantitative easing to provide liquidity in the market.
Interestingly, there were no cuts to interest rates which was not pleasant for investors.
Is There a Recession Coming?
As per the IMF (International Monetary Fund), COVID-19 has pushed the world into a recession.
They are expecting this recession to be worse than the global financial crisis of 2008.
Lockdown in the US affected the economy badly. Since the US economy is the biggest in the world, most other economies in the world have been damaged
As of 8th April 2020, Bloomberg has modelled as the chance of a recession in the next 12 months at 100%
This happened similarly in 2008 when the global financial crisis started out in the US.
Let’s look at how we could benefit from such a situation, and what we should avoid in this crisis.
How Can We Benefit From Such Crisis?
As with all trading, there are winners and losers.
It is true that some people will benefit from such a crisis. Being a trader, you should understand that making moves on the market at the right time is a way to always take advantage of such occasions.
How, and what can we do in the event of an global pandemic?
When a crisis occurs, investors rush to buy/sell certain assets.
Let’s go back in time and see how certain assets reacted in the 2008 global financial crisis. This is a great way
In doing this, we can predict what might happen in the 2020 crisis, if things get worse.
We can see from the chart above, that in the 2008 financial crisis, gold rallied upward from a price of 800 to 1200 US Dollars.
Based on this precedent we should expect the price of gold to start to move upward and begin to mark higher highs.
Another asset class we should keep an eye on in such crisis is crude oil.
During the 2008 global financial crisis, the price of oil dropped sharply from 140 US dollars per barrel to around 40 US dollars per barrel.
That’s a huge move in the market; investors who short sell this instrument (CFDs or otherwise) made a lot of money!
What Should We Avoid?
After seeing how we should benefit from such a crisis, we should look at things to avoid in this market during a similar crunch.
Our experience shows that stocks in the time of a financial crisis drop dramatically.
It is best to avoid buying any index or even any stock during this market.
There are outliers, such as stocks that make sense to gain from the current economic situation, such as NetFlix, with more people being home watching television, it makes sense for this to have a positive effect on that stock.
Generally stocks and indices need to be researched and monitored closely, or could be short sold.
Looking at the 2008 financial crisis, we can see how the S&P500 moved downward from 1241 to nearly 700 USD.
This is a drop of 541 points in one year. Avoiding stocks in this period would be a smart idea, however, shorting them via a CFD product could be of huge benefit.
In times of recession, real estate and properties face a considerable drop. Why? Due to high unemployment, people start to default on paying their home mortgages
In the chart above we’ve highlighted how the MSCI US REIT INDEX, made a big move downward from 745 to nearly 300 USD dollars in just six months after the 2008 recession began.
Everyone is waiting to see what will happen next.
What is apparent is that this crisis has already begun. The question is how much more can the markets fall.
The unemployment rate rising is a clear indication of a starting recession. As of last week, 3.3 million Americans filed for unemployment.
As of the 4th April, 3.56 million Spaniards filed for unemployment.
The world could be facing a severe financial crisis, even more, significant than the global financial crisis of 2008.
With this we will see companies filing bankruptcy, employees losing jobs, and big banks calling for chapter 13.
Politically, Italy is annoyed by its European allies and neighbours. They considered that they did not get enough support from them in this critical situation.
The European Union is now under further test, whether this strong union will continue, especially after Brexit, nobody knows.
This month, we saw the Russians helping the Italians in fighting the pandemic. Is this the beginning of a new relationship between Italy and Russia?
Another question to be asked, who is going to be the next global leader or superpower of the post-COVID-19 world? US or China.
There are many conspiracies beginning to circulate throughout social media.
Did COVID-19 appear by “naturally” or was it a human bio-lab mistake. Nothing is obvious now, only time will tell.
Global COVID-19 Cases
What Can We Learn From This Situation?
Many lessons should be learned from the disease that stopped the world.
We can see how vulnerable the world is to just a 70-90 nanometer virus.
Financially, we noticed that the economies could not bear a few weeks of lockdown.
All the countries are afraid of a new global financial crisis. Should we be more prepared in case something similar happens in the future? Should developed countries be more willing to help others? Is it time for the big nations to open their eyes to environmental issues and put nature first? There are so many more questions to be asked and let’s hope the world leaders are asking them too.
We have shown you how the COVID-19 affected the financial market by massive movements in most the instruments. We mentioned how could you benefit, and what to avoid by displaying what happens in the similar case of 2008. Considering these facts from 2008 will help you to extract some real money out of this financial market. Finally, are we about to face similar global financial crisis as of 2008 considering September is about to come?
Consider any risk in this period before investing any penny in the financial market. Good Luck!
Live Coronavirus COVID-19 Dashboard
Johns Hopkins mapping COVID-19 dashboard
Follow these tips below to prevent the spread of this virus:
Latest COVID-19 Updates
The World Health Organization launched a Health Alert messaging service via WhatsApp Inc. The service provides the latest news and information on #COVID19, including details on symptoms and how to protect yourself.
To subscribe, click here.