Philippines and Sri Lanka shut the financial markets amidst the COVID-19 turmoil, should other countries follow their steps? The concerns regarding the worldwide spread of the virus have been reflected in the financial markets, triggering their circuit breakers on multiple occasions.
On the 16th of Monday the S&P 500 registered the sharpest single-day drop of 12 per cent since 1987, resulting in the third worst day on record after the index crash in October 1929 and 1987, it has been argued the possible temporary market closures.
In a period of markets fluctuation and the prices decline, reflecting challenging times characterized by large uncertainties, would it be better to shut down the stock market until the crisis eases? Would it be a chance to handle better the COVID-19 impact over the economy or would it make the financial situation worsen?
Previous times of crisis led to the shutting down of markets. In APAC region the most recent case regarded the wake of the Black Monday crash in 1987, when, however, the closure of Hong Kong Stock Exchange in December was negatively perceived by investors, leading to a short-term erosion of confidence in Hong Kong market. Ergo, the financial markets have already experienced closure measures in time of crises. After 9/11 terrorist attacks, the America’s stock market stayed closed for a week. The Greek Market has been shut for five weeks in 2015. Recently, in 2012, the NYSE was closed for two days because of the impact of Hurricane Sandy.
As already happen in the past, the negative impact of COVID 19 may conduce countries to the difficult decision to close the stock market. After Philippines equities have plunged more than 30% this year, among the biggest tumble in APAC, the Philippines Stock Exchange has decided to shut the stock, bond and currency trading, being the first big country to suspend trading because of coronavirus pandemic.
The decision is connected to President Rodrigo Duterte’s decision to widen the month-long lockdown of the country’s main island and economic powerhouse, Luzon. “The enhanced community quarantine” imposed by Duterte Government led to the lockdown of 105m population until April 13. A decisive action necessary to control the sharp rise of COVID-19 cases in the Philippines.
The Manila bourse had registered the hardest hit among Asian’s markets. In the same week of the difficult decision of interrupting trading, the $188 billion bourse fell 10 per cent for the first time since 2008 crisis, hitting the circuit breaker. Even taking into account the attempt of the finance secretary Carlos Dominguez to increase market confidence, by ordering state pension funds to double their daily share purchase volume, the Philippines market is down 32 per cent year to date.
The Philippine stock exchange chief, Ramon Monzon, said he plans to reopen the market only when the safety of traders, and employees could be properly guaranteed.
Sri Lanka followed the Manila’s bourse example in shutting its financial markets, opening the road to speculation whether other Asian countries will take similar measures due to the fear of global recession, and the consequent stocks plunging around the world.
Many countries, including Korea and Indonesia, are releasing statements to confirm their plans to stay open, assuring to the investors they don’t plan to shut down the trading activities. The Australia’s market regulators stated their decision to not interrupt trading but to proceed with accurate measures to guarantee the market’s orderliness and resilience. The measures adopted include a reduction of a quarter of the volume of trading by institutions to avoid the risk that high-frequency transactions may overwhelm the infrastructure.
An evocative comparison is juxtaposing the possible closure of stock market to US banks holiday in 1933 and the bank run. The bank run is caused by people fear of bank’s collapse. As people want to preserve their savings, they will withdraw money from bank, leaving it without liquidity to provide loans. Extraordinary Bank holidays are a reasonable measure to avoid a single bank failure due to the withdrawal of all deposits in the same day. Furthermore, Franklin Delano decision was motivated by a significant reform designed to supervise the deposits guarantees.
On the other side, the closure of stock markets won’t be followed by significant reforms, and won’t have the effect of calming the turbulence. It will lead to the opposite effect of increasing uncertainty and market anxiety, leaving the investors without access to their money, and not guaranteeing them transparency.
As long as the stock markets stay open, bourses will assure the price discovery function. The global economy will suffer incredibly from the lack of public prices, leaving the small investors to struggle to value assets, securities, commodities. The fluctuation of prices quantifies the concerns regarding the economic impact of travel bans and supply chain disruption, and it would be an enormous mistake to interpret it as a dysfunction of markets. As soon as the outlook clarifies, hopefully with positive news regarding a decrease of the infection’s numbers, the share prices will stabilize.
Greis Gaeta
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On the 16th of Monday the S&P 500 registered the sharpest single-day drop of 12 per cent since 1987, resulting in the third worst day on record after the index crash in October 1929 and 1987, it has been argued the possible temporary market closures.
In a period of markets fluctuation and the prices decline, reflecting challenging times characterized by large uncertainties, would it be better to shut down the stock market until the crisis eases? Would it be a chance to handle better the COVID-19 impact over the economy or would it make the financial situation worsen?
Previous times of crisis led to the shutting down of markets. In APAC region the most recent case regarded the wake of the Black Monday crash in 1987, when, however, the closure of Hong Kong Stock Exchange in December was negatively perceived by investors, leading to a short-term erosion of confidence in Hong Kong market. Ergo, the financial markets have already experienced closure measures in time of crises. After 9/11 terrorist attacks, the America’s stock market stayed closed for a week. The Greek Market has been shut for five weeks in 2015. Recently, in 2012, the NYSE was closed for two days because of the impact of Hurricane Sandy.
As already happen in the past, the negative impact of COVID 19 may conduce countries to the difficult decision to close the stock market. After Philippines equities have plunged more than 30% this year, among the biggest tumble in APAC, the Philippines Stock Exchange has decided to shut the stock, bond and currency trading, being the first big country to suspend trading because of coronavirus pandemic.
The decision is connected to President Rodrigo Duterte’s decision to widen the month-long lockdown of the country’s main island and economic powerhouse, Luzon. “The enhanced community quarantine” imposed by Duterte Government led to the lockdown of 105m population until April 13. A decisive action necessary to control the sharp rise of COVID-19 cases in the Philippines.
The Manila bourse had registered the hardest hit among Asian’s markets. In the same week of the difficult decision of interrupting trading, the $188 billion bourse fell 10 per cent for the first time since 2008 crisis, hitting the circuit breaker. Even taking into account the attempt of the finance secretary Carlos Dominguez to increase market confidence, by ordering state pension funds to double their daily share purchase volume, the Philippines market is down 32 per cent year to date.
The Philippine stock exchange chief, Ramon Monzon, said he plans to reopen the market only when the safety of traders, and employees could be properly guaranteed.
Sri Lanka followed the Manila’s bourse example in shutting its financial markets, opening the road to speculation whether other Asian countries will take similar measures due to the fear of global recession, and the consequent stocks plunging around the world.
Many countries, including Korea and Indonesia, are releasing statements to confirm their plans to stay open, assuring to the investors they don’t plan to shut down the trading activities. The Australia’s market regulators stated their decision to not interrupt trading but to proceed with accurate measures to guarantee the market’s orderliness and resilience. The measures adopted include a reduction of a quarter of the volume of trading by institutions to avoid the risk that high-frequency transactions may overwhelm the infrastructure.
An evocative comparison is juxtaposing the possible closure of stock market to US banks holiday in 1933 and the bank run. The bank run is caused by people fear of bank’s collapse. As people want to preserve their savings, they will withdraw money from bank, leaving it without liquidity to provide loans. Extraordinary Bank holidays are a reasonable measure to avoid a single bank failure due to the withdrawal of all deposits in the same day. Furthermore, Franklin Delano decision was motivated by a significant reform designed to supervise the deposits guarantees.
On the other side, the closure of stock markets won’t be followed by significant reforms, and won’t have the effect of calming the turbulence. It will lead to the opposite effect of increasing uncertainty and market anxiety, leaving the investors without access to their money, and not guaranteeing them transparency.
As long as the stock markets stay open, bourses will assure the price discovery function. The global economy will suffer incredibly from the lack of public prices, leaving the small investors to struggle to value assets, securities, commodities. The fluctuation of prices quantifies the concerns regarding the economic impact of travel bans and supply chain disruption, and it would be an enormous mistake to interpret it as a dysfunction of markets. As soon as the outlook clarifies, hopefully with positive news regarding a decrease of the infection’s numbers, the share prices will stabilize.
Greis Gaeta
Want to keep up with our most recent articles? Subscribe to our weekly newsletter here.