The novel coronavirus (Covid-19), which first identified in China’s Wuhan and spread rapidly around the world, is the most important factor affecting global asset prices in 2020. Concerns in markets, especially with the global shock of the outbreak, and the news feeds that will lead to these concerns, shape investor sentiment and play a role for asset pricing.

The World Health Organization (WHO) declared the pandemic in March, when the Covid-19 outbreak was rapidly spreading across the world, especially in the United States and Europe. The supply shock followed by the demand shock that accompanied the outbreak was strengthened by measures implemented by the public authorities of developed and developing countries to limit the outbreak, causing global economic activity to be reduced to a minimum for a significant portion of the first half of the year. During this period, VIX Index, known as the ‘fear index’ in the markets,[1] was up by 85 points, the highest in 12 years.

[1] VIX Index: Calculated by the Chicago Board Options Exchange (Cboe) based on the difference between the purchase and sale prices of options contracts, in which stocks in the S&P index are the main assets. If the index value declines below 20 points the risk perception is low and future estimates are becoming optimistic. An index value above 30 points, on the other side, means that risk perception is strong and future estimates are getting pessimistic. If the index value is between 20 and 30 points, the situation is normal, but there is a pressure in the markets and pessimism prevails.

Plague, depending on the economic outlook expansionary monetary stance in the name of ease that occurs on strong downward pressure, the central banks of developed and developing countries, as well as the massive expansion of central government fiscal support to households and businesses in order to go after the shock of aggregate demand led to a path to recovery. In addition, in the second quarter of the year, the loosening of the harsh measures imposed on controlling the pandemic’s production rate in developed countries was an important step in the recovery of global supply despite the breakaway supply chains, while on the other hand, the VIX Index fell as much as 23 points. However, the volatility indicator, which is set to return to normal levels after the global shock, has not been able to sustain the move.


Second Wave of Outbreak

With the high emission of monetary and fiscal policies and low costs in the markets, with the appetite of abundant liquidity, the expectations of the opening of economies and the recovering risk appetite after the Covid-19 pandemic were brought under control, showed a great demand for stocks, precious metals and developing country currencies. VIX paused for a short time after the second wave of the Covid-19 outbreak occurred in developed countries such as Japan and France, especially the USA, which is the world’s largest economy. Marking that the deterioration in the risk perception of investors has started again by increasing to 44 points, VIX decreased by up to 20 points, which can be considered as moderate, with the transition to clinical trials in potential Covid-19 vaccines as of the second half of the year. As of the previous day, it was reported that the first vaccine for Covid-19 was approved by the Russian Ministry of Health and production will start within 2 weeks. However, there was no aggressive optimism in global stock markets following the VIX Index, although precious metals in particular depreciated sharply in spot pricing.

It should be noted that the VIX Index, known as the fear index or uncertainty Index, which is followed as the leading indicator of volatility in the markets, has not seen a decline below 20 points since February. In addition, it is worth noting that the positive news flow for the first Covid-19 vaccine has not completely removed the hazy mood in the markets, allowing the index to move below 20 points.

Following Russia, it is considered certain that different potential Covid-19 vaccines will be developed by biotech companies in developed countries such as the USA, UK and Germany in the autumn of 2020 – spring 2021. However, after all the test stages of the vaccine, it is a great uncertain element in the perception of the investor that the questions of how to create the supply chain for the initiation of the treatment process by starting mass production and how to make it globally widespread. Accordingly, the fact that second wave concerns are still on the agenda and the unpredictability of the measures that monetary and financial authorities can take in the face of weakening economic recovery also prevents an optimistic perception in the market participants by dropping below 20 points in VIX Index.

To interpret the fear index with technical analysis based directly on human psychology, it is possible to say that the index, which fluctuates around 22 points in current terms, has made upward attempts to end its negative trend that started from the peak level of 85 in March. On the other hand, in a setting where there is no strong transition scenario below the threshold 20 level, we can see progress towards 30 points in the index with the stress that may increase in the markets if the transition towards the downward trend can be achieved through upwards attempts, when it is taken into consideration that the index is preparing for a descending wedge pattern. In this context, it will be possible to expect a strengthening of the weakening in stock market indices and the recovery of safe assets in stock market indices, where the desire to rise has weakened recently.


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