2020 has brought substantial changes to the future trajectory of the capital markets industry.
In Canada, the GDP in quarter 1, 2020 represented a decrease of 2.1 percent from $US1736.43 billion in 2019 and an increase of 4.5 percent in the second quarter of 2020. The Canadian unemployment rate was at 10.9 percent in July 2020 as individuals returned to work, 12.3 percent in June 2020 as compared to 5.6 percent in February 2020. With the Canadian consumer price index inflation rate, there was an increase of 0.7 percent year-on-year in June 2020 after a decrease of -0.4 percent in May 2020 and above market expectations of 0.3 percent gain, the biggest increase in consumer prices since March 2011.
Lost output will catch up gradually as containment measures are changed when individuals return to their employment and production begins to increase. The Canadian government has gone to unusual lengths to build and reinforce a bridge to recovery by assisting in hardship and reducing any lasting damage that will impair growth. In its monetary policy, the Bank of Canada lowered the overnight rate by a cumulative 150 basis points since March 25, 2020. Although there are low interests rates, which may not create demand, they are, in fact, laying the foundation once recovery is on its way and containment is lifted. The next course of action will be to repair market functioning.
The UK GDP was $US2827.11 billion in 2019; shrinking to 2.0 percent in the first quarter of 2020, the largest fall since quarter 4 in 2008. Unemployment was 3.9 percent in the UK from March to July 2020, but the figure may change for August 2020. The March to May numbers show weakening employment rates in self-employed and part-time workers. Although these reductions, unemployment is not rising because of increases in individuals out of work, but not looking for employment. The annual UK consumer price index inflation rate increased to 0.6 percent year-on-year in June 2020 from a 4-year low of 0.5 percent in May 2020. The short-term funding followed the same as Canada and with the Treasury funds where the UK released “wartime” funding.
The United States GDP was $US21,427.70 billion in 2019 with a -32.9 percent in quarter 2, 2020 and -5.0 percent in quarter 1, 2020, the sharpest quarterly decline since the 8.4 percent fall in quarter 4 of 2008, during the depths of the financial crisis. In February 2020, the U.S. unemployment rate was 3.5 percent and skyrocketed after this date to 14.7 percent in April 2020, was 11.1 percent in June 2020 and was 10.2 percent in July 2020, higher than the Global Financial Crisis peak of 10.0 percent. The decrease in employment from June to July 2020 is due to businesses re-opening and rehiring employees after the COVID-19 lockdown. The consumer price index inflation rate for the U.S. was 2.5 percent year-on-year in January 2020, 0.1 percent in May 2020 and 1.0 percent in July 2020, recovering further from May’s 4 ½-year low and ahead of market expectations of 0.8 percent.
As with Canada, the U.S. short-term funding markets seized up as creditors ran from the shadow banking system, and banks and other lenders felt incredible stress. The U.S. Federal Reserve, strengthened and supported the remarkable deployment of Treasury funds, and took unprecedented steps to put barriers in place for large segments of the financial system in case of financial instability, which would further exacerbate the pandemic’s immense economic collapse.
COVID-19, a game changer until or if there is a development of a vaccine. Companies will diversify in other countries until the SARS-CoV-2 settles down. The pandemic will affect production in manufacturing centres, particularly in places like China, Vietnam and India; logistics; and supply chains as companies cannot fly into countries. India and other countries receive IT outsourcing, customer service mechanisms, just to name a few. Prior to the coronavirus disease, there was a genuine backlash against globalization and due to this pandemic, it will increase in the future. There is an anti-immigration sentiment among many countries, particularly in the U.S. and UK.
It has destabilized financial markets and has placed enormous stress on financial institutions. Suddenly short-term funding markets no longer work properly since creditors ran from the shadow banking system, and banks and other lenders are beginning to feel stress as businesses and households face difficulties meeting their financial commitments. As a result, the Bank of Canada did repurchase agreements against a broad range of high-quality collateral for terms of up to two years and put in place a Standing Term Liquidity Facility open to a wide range of financial institutions. The banks took up the offer and lent to households and businesses. The Bank of Canada reduced the amount it purchased at auction from 40 percent to 20 percent of tendered amounts, which is has returned to the average level before the onset of the coronavirus. The Government of Canada Treasury Bill market strains have waned recently.
Conflict is prevalent in many countries with the roles of other major powers changing, having an effect on capital markets. The U.S. established new tariffs on Chinese imports at 19.3 percent on February 14, 2020, tariffs more than six times higher than before the trade war in 2018.
Hong Kong has a more international culture from its past British colony and is an international city with a multi-ethnic society, but has retained Chinese cultural values, making it quite different from many areas of mainland China. Tensions between Hong Kong and mainland China have existed since the early 2000s, but has escalated recently with the passing and signing of the Hong Kong national security law, officially the Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region, by the Chinese Standing Committee of the National People’s Congress on June 30, 2020. President Donald Trump signed the Hong Kong Autonomy Act, which imposes sanctions on officials and entities in Hong Kong and mainland China deemed to assist in violating Hong Kong’s autonomy. The financial institutions are holding out at this point in terms of whether to stay in Hong Kong or not.
Technology, an immense player, continues to be on the world stage due to cyber attacks, affecting businesses in unprecedented ways, brings about discussion on cyber crime, terrorism and their perpetrators. A series of cyber attacks on significant financial market utilities, a multilateral system that provides the critical infrastructure for transferring, clearing and settling payments, securities and other financial transactions in a group, including financial institutions or between financial ones and the system, would compromise the capital market stakeholders with a potentially serious fragmentation of the global financial system. Fintech companies, outsourcers and industry utilities, bank and publicly owned, brought in new management, challenges in regulations and cost and efficiency advantages.
Regulations tend to be restrictive on generating profits. Capital market and financial regulators are taking active steps to mitigate crucial market disruptions as a result of COVID-19 thereby increasing flexibility in respect of regulatory requirements and urging firms to be mindful of apprising investors of risks. Central banks decreased policy rates and implemented programs to mitigate the economic fallout and lay the preliminary steps to recovery.
A large macro event, merger, acquisition, bankruptcy or idiosyncratic event, is where a price of an asset declines because of an event, which particularly affects the asset, but not the market. Say, for example, a company suffers a major plant closure, its stock price may be affected. Either of these two events that adversely affects global economies will cause a failure of systemically important financial institutions – particular large banks tracked and labelled by various authorities, depending on the scale and degree of influence they hold in domestic and global financial markets or financial market utilities, prompting a re-evaluation of the systemic risk concentration and ways to manage these risks. Mergers and acquisitions are more complicated to execute as a result of COVID-19 and a volatile market, reviving the banking industry.
Governments are met with tremendous resistance to austerity measures, attempts to remarkably curtail government spending in an effort to control sovereign debt payments, central bankers will accept a number of years of higher inflation so as to erode the real value of debt and wages, creating chaos on capital markets. The result will eventually cause harsher austerity measures to deal with hyperinflation and panic in several G20 countries.
The reduced bank-lending capacity coupled with the unparalleled requirement to build urban infrastructure and the needs of investors to earn greater returns will support and strengthen new capital markets and assist in reviving securitisation markets because the local financial institutions and capital bases can no longer support this condition.
The rising aging population and healthcare spending facing the lowering of uninsured rates in Western economies will propel capital markets innovation since insurance companies and governments will search for new ways to offset risk. This with the growing requirement to address unfunded liabilities, such as pensions will lead the development of new and creative investor-based solutions to fund these challenges.
Over-regulating financial markets will invigorate large additional growth in the shadow banking system, group of financial intermediaries that provide credit across the global financial system, but outside normal banking regulations. Further growth will be magnified for monoline finance companies involved in the practice of specializing in one area of expertise in the financial sector -credit card issuance, mortgages and finance; hedge funds; private equity firms and other-buy-side participants.
The shadow banking system competition will increase with the typical outcome – risk being mispriced, poor decisions will be made – resulting in the accrual of debt at an accelerating pace, which will lead to a sequence of failures and government intervention and regulation of the sector.
Companies are positioning themselves in the best way in light of the upcoming U.S. election.
Capital markets have and will continue to undergo changes.