Information Uncertainty and the Financial Markets: The COVID – 19 Outbreak and Global Implications

Abstract

The financial markets appeared to have weathered recent storms which dominated the financial landscapes in 2019 – namely trade wars, which spanned from retaliatory tariffs to currency devaluations – as well as impending imposition of digital sales taxes which even threatened to escalate retaliatory tariff wars even further. Reductions in interest and federal funds rates – unprecedented and surprising moves by the Federal Reserve, as first instigated in August 2019 to address anticipated global uncertainties – the first federal rate cuts since 2008, had left investors in a divided state of opinions. Partly because the rate adjustments had been considered unjustified.

However as 2020 has revealed and demonstrated, the financial markets are yet to experience greater levels of uncertainty and volatility in the light of the corona virus (COVID-19) outbreak – as it increasingly becomes evident that the real impact – and even the true extent of the cases remains, to a larger extent, unknown. A clearer picture of the real costs and possible impending consequences of the outbreak (as well as failures to disclose real figures of underlying cases) will revealed, it appears, in the second half of 2020.

By then, the progress made in respect of addressing the outbreak – particularly in those strategic economic sectors which have impacted global trade and growth could be more reasonably evaluated. Even though it is fair to say that an effective cure cannot be diagnosed for a problem – about which little or limited information is known, it is also fair to say that serious problems of disclosure and transparency about the real figures, potential threats have also contributed to the levels of uncertainty which have destabilized global financial markets. Thus it is also fair to say that a reason why financial markets are particularly sensitive to news about the corona virus, relates to the current levels of uncertainty, data, knowledge and information about the potential spread and effects of the virus.

Whether the outbreak has reached its peak – or more importantly, when and how it will do so, remains an unanswered question. From recent reports, the COVID 19 has generated far reaching economic repercussions in the least unexpected areas – in terms of geographical location from the outbreak sources. With the exception of the Antarctica, every other continent now has a confirmed case – the most recent being Brazil ( South America).

Hence the impending challenges become even clearer. Not only is this a global problem – but also an issue of how respective regions and countries will be able to address and contain the risks emanating from contagion – as well as the availability of resources and facilities to address such risks. Whilst it may be selfish to hope that less disadvantaged countries and jurisdictions are not severely impacted by the outbreak, the reality is that it is nevertheless a global problem. And if more advanced economies are better equipped to address the problem, it should be hoped that the issue does not escalate further to the extent of severely impacting impoverished nations – as this would make the issue of addressing the overall problem even more difficult.

As well as considering the progress made in respect of the above mentioned developments, this paper also, by way of illustration to recent economic data and evidence highlights the impacts and possible consequences of the phenomenon. In highlighting its significance, it aims to address why associated risks should be factored into monetary policy assessments and analyses.

Keywords: Information gaps, disclosure, transparency, regional data accounts, micro, macro analysis, cross border risks, exposures, COVID-19