COVID-19 Pandemic, Real Economy Shock Becomes Visible "Risk-Off Reemerges"

[Asia Economy Reporter Kangwook Cho] It has been argued that the shock originating from the real economy due to the global spread of the novel coronavirus infection (COVID-19) is becoming visible in the international financial markets.

As a result, risk-off, which moves funds to safe assets, is being re-emphasized.

Lee Sang-won, Deputy Specialist at the International Finance Center, stated in the report titled "Visualization of the Real Economy Shock from the COVID-19 Pandemic" on the 18th, "The international financial market is showing a re-emergence of risk-off due to the visibility of the real economy shock from COVID-19, as U.S. economic indicators are weak and international organizations and credit rating agencies have lowered their global GDP growth forecasts."

Risk-on refers to operating funds in risky assets such as stocks, commodities, and high-interest currencies. Conversely, risk-off means moving funds to relatively safe assets such as government bonds and time deposits when pessimism gains strength in the market.

In fact, looking at last week's international financial market trends, stock prices, interest rates, and oil prices fell, while the dollar strengthened.

Global stock prices showed a slowdown in the rebound that began in late March as the economic recession caused by COVID-19 became visible (4th week of March +8.8% → 1st week of April -2.1% → 2nd week +9.9% → 3rd week -0.2%).

The U.S. dollar showed strength (+0.5%) by appreciating again in a risk-off pattern due to global recession concerns, and the Japanese yen also showed signs of recovering its safe-haven currency function (+0.5%).

Major countries' government bond yields fell (U.S. -9bp, Germany -13bp) due to worsening economic outlook and deflation concerns, but this was partly due to the continued ultra-loose monetary policy stance of major central banks.

International oil prices fell below $20 per barrel (WTI -12.7%) due to concerns over a sharp drop in global oil demand caused by COVID-19, despite OPEC+'s production cut agreement (April 12, 9.7 million barrels per day cut in May-June).

The KOSPI fell (-0.2%) due to continued net selling by foreigners since March 5, and CDS remained stable. Foreign investors net sold 700 billion KRW in domestic stocks (April 13-16, annual -20.2 trillion KRW) and net bought 500 billion KRW in bonds (April 13-15, annual +11.2 trillion KRW, outstanding balance 134.7 trillion KRW).

Looking at major countries' trends, international organizations and credit rating agencies are continuously lowering their global economic outlooks.

The IMF, in its World Economic Outlook, revised the global GDP growth forecast for this year down from 3.3% to -3.0% (2019 was -0.1%) (advanced economies +1.6% → -6.1%, emerging economies +4.4% → -1.0%).

It particularly applied the assumption that the COVID-19 pandemic would weaken in the second half of this year and containment measures would be gradually lifted, but warned that there is a significant risk of much more severe outcomes.

S&P lowered its global GDP growth forecast for this year to -2.4% (U.S. -5.2%, Eurozone -7.3%), and the World Bank forecasted Latin America's 2020 GDP growth at -4.6% (Brazil -5.0%, Mexico -6.0%, etc.).

The UK Chancellor of the Exchequer mentioned that the UK's Q2 GDP contraction could reach 30%.

U.S. retail sales worsened from -0.4% in February to -8.7% in March (the largest decline ever, Bloomberg forecast -8.0%), and industrial production deteriorated from +0.5% in February to -5.4% in March (-4.0%), showing the visible impact of COVID-19 on the real economy.

The U.S. Federal Reserve Beige Book (including information up to April 6) diagnosed that U.S. economic activity sharply and abruptly contracted in recent weeks, resulting in job losses and wage declines.

Lee said, "The pattern of stock price declines and dollar strength accompanying global recession concerns is being reproduced," and added, "With the U.S. Treasury's currency report announcement imminent, attention should be paid to the U.S. government's stance on the dollar's strength."

This content was produced with the assistance of AI translation services.