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Commentary on financial market developments – February 2020


  • Coronavirus
  • Chinese monetary stimulus


Equity markets have not had a good run so far this year. After a disappointing January came an even worse February, with the major stock markets losing between -8% and -9%. The cause is clearly the coronavirus epidemic that has gradually spread from mainland China to virtually the whole world. Fortunately, not yet to Africa and South America.

In response to the epidemic, the Chinese central bank has approved a monetary stimulus of USD 170 billion. These were mainly open market operations. Subsequently, the Chinese central bank provided a further injection of liquidity and injected a further USD 70 billion into the financial system through reverse repos. In addition, the Chinese authorities banned speculation on falling share prices (short trades). On the other hand, financial institutions there have been increasing their equity exposure to support the stock markets, which is why Chinese equities lost less than those in developed markets in February. This is a fairly common practice in China – Chinese insurance companies and funds behaved similarly in 2015, when the local market was in crisis. China also halved the tariff imposed on nearly 2,000 US products in September 2019. China has made it a priority to mitigate the impact of the coronavirus on its economy as much as possible.

Unfortunately, stock markets lost the most in the last week of February when the coronavirus became more widespread in Ervopa especially in Italy. There are fears that the developed European economy is not yet at the peak of the epidemic and that the number of infected people will still increase significantly, which, together with various protection measures, will lead to a decline in economic activity.

It remains to add that in February the CNB raised interest rates by 25 basis points to 2.25%. This is mainly in response to accelerating inflation, which rose from 3.2% to 3.6% year-on-year in January. This is the fastest annual growth rate since March 2012. The rise in inflation is mainly due to rising housing rents and pork prices, but higher excise taxes imposed on tobacco and alcohol have also had an impact.

Oil is also coming under unprecedented pressure on fears of a coronavirus-induced slowdown in the global economy. The price of Brent crude oil fell by almost -12% in February, posing a significant threat to economies dependent on exports of the commodity such as Russia and Saudi Arabia. This is also documented by the map of world indices, which shows that the stock markets of these countries lost the most in February, and yet they are practically unaffected by the virus.

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