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Coronavirus: The Soon To Be Aftermath in the Business World. What Will It Look Like?

Many financial players have been aggressively shorting those industries’ stocks that have been severely affected by the COVID-19 outbreak

by Raffaele Cicala and Giovan Giacomo Giordano

The New York Stock Exchange on March 18, 2020

Almost three months have gone by since the original COVID-19 outbreak in China in early December from last year, and the adverse macroeconomic effects the outbreak had on multiple industries have already been significant.  In this scenario, as the market itself is incapable of reaching an equilibrium, the intervention of the national governments around the globe plays a fundamental role in attempting to preserve the market balance among different industries and sectors. 

U.S. equity futures have posted their worst drops in recent years. On March 16th, the Dow dropped by nearly 3000 points, its worst single-day drop in history. The Standard & Poor’s stock index has incurred a 29.5% loss in the current bear market in the midst of pandemic fears.  Industries most affected by COVID-19 in the U.S. include retail, transportation, and travel. The losses incurred by these industries are in direct response toward measures taken to combat the spread of the virus. Examples of these measures include restrictions on international and domestic travel, primarily affecting airline industries. It is projected that the U.S. and Canadian Airline industries could lose upward of $21.1 billion in revenue. Such projections and current mitigation strategies have prompted airline representatives in writing to congressional leaders for aid packages to help stimulate the struggling industry. The Treasury Department has proposed $50 billion in a coronavirus stimulus plan, however, the proposal falls short of the initial bid of $29 billion in aid for grants and loans respectively. The hotel industry has also been affected by the COVID-19 pandemic. The industry employs over 1.6 million Americans, making it one of the largest employers in the country. Since the virus has prompted many individuals to stay at home, demand for hotels has dropped significantly. The decrease in hotel service demand has pressured congress to pass a supplemental aid package intended to help hedge against large decreases in revenue. Due to similar reasons mentioned above, other industries that have been impacted by the pandemic include movie theatres, cruises, gambling, live sports, and retail.

These dramatic effects on the financial market are further enhanced by the aggressive trading strategies employed by hedge funds and investment banking firms.  Indeed, many financial players have been aggressively shorting those industries’ stocks that have been severely affected by the COVID-19 outbreak.

In 2008 banks issued subprime mortgages that ultimately led to a housing shortage that from 2000 to 2006 drove up home prices. This eventually led to temporary regulatory restrictions. Indeed, back in 2008 the Security and Exchange Commission (SEC) and the UK’s Financial Services Authority (FSA) placed short sale bans in order to avoid a “domino effect”. A domino effect would be caused by pressure to sell shares of the underlying stock, which would in turn cause continued downward trend.   Following the escalation of events arising from the COVID-19 outbreak, South Korea’s Financial Supervisory Service, Spain’s and Italy’s financial regulators have already placed significant restrictions on short sales in order to preserve their financial markets integrity.

Assuming the original premise of this article, namely that national governments’ intervention is necessary to ensure an equilibrium in the financial market, shouldn’t it be wise to place temporary restrictions on short sales in order to avoid a second 2008-domino effect?

 

 

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