2020: a year of great volatility in the financial and commodity markets
2020 saw perhaps the strangest economic event in the history of modern capitalism when the futures contract price for West Texas Intermediate (WTI) crude, the benchmark for US crude prices, turned negative on April 21. falling below zero that day had a technical aspect. “The drop in prices was partly due to the way oil is traded. A futures contract is for 1,000 barrels of crude, delivered in Cushing, where energy companies own storage tanks with approximately 76 million barrels of capacity. Each contract is traded for one month, with the May contract expiring on Tuesday (April 22). Investors who had May contracts did not want to receive the oil and incur storage costs, and in the end they had to pay people to take it off their hands, ”explains a Reuters article. This otherwise bizarre event is also the best example of the importance of future expectations in many transactions in the financial and commodity markets in today’s world.
As the world economy moved between bouts of pessimism and optimism in a year devastated by the pandemic, driven by developments on the virus and vaccine fronts and the political response to the pandemic, expectations and markets also suffered a great volatility. Here are four charts that capture these changes.
2020 was the most volatile year for oil prices since 1987
The US Energy Information Administration (EIA) has daily data on Brent crude prices since May 20, 1987. An HT analysis of these data shows that 2020 saw the largest intra-annual variation (the minimum and maximum daily price in a year) of 670.3% in oil prices during this period. This is more than double the second largest year-on-year fluctuation of 326.8%, which occurred in 2008, the year the global financial crisis erupted. 2020 also saw the highest number of cases where the inter-day movement in Brent crude prices was more than 5%. Certainly, the EIA data excludes the period of the 1973 oil crisis, when oil prices skyrocketed.
Indian stock markets suffered their biggest drop between days in 2020
The BSE Sensex, India’s benchmark stock index, suffered its biggest day-to-day decline of 13.15% on March 23, a day before Prime Minister Narendra Modi announced a national shutdown. The Sensex fell from the close of the previous day from 29,915.96 to 25,981.24, the lowest value since December 26, 2016. The year 2020 included 3 trading sessions: March 12, 16 and 23, which were among the top 10 drops between days in the index’s history. The EEB daily indices have been available since April 3, 1979 on the EEB website.
However, the markets recovered quickly. By March 26, the BSE Sensex returned to the level of March 22. It has maintained its upward trajectory since then and crossed the pre-lock all-time high of 41,952.6 on January 14, 2020, closing at 42,597.4 on November 9, 2020. BSE has risen further since then and was at an all-time high of 46.973, 5 on December 24, 2020.
The highest inter-day profit of the EEB was recorded on May 18, 2009, when it increased by 17.34%. For 2020, the largest day-to-day rise occurred on April 7, 2020, when the index values gained 8.97%, which was also the 10th highest historically. Aside from these two cases of high inter-day raises, all of the other 10 highest inter-day raises for the BSE Sensex are from 1992 or earlier.
There were nine days in 2020 when the change between days on the BSE Sensex was 5% or more. The most volatile year in this regard was 2008, the year of the global financial crisis. A comparison of the intra-annual variation of the high and low values in the BSE places 2020 in the ninth rank, with 2008 topping the charts once again.
Volatility in the US equity markets.
Bloomberg has daily data for the Dow Jones Industrial Average (DJIA), the US primary equity index, as of January 30, 1895. The DJIA saw its fourth-highest interday decline of 12.9% on 16 March this year. It is the biggest drop between days since the Black Monday crash of October 19, 1987, when it fell by 22.61%, which was also its biggest drop between days in DJIA history. As in India, equity markets rallied rapidly in the US as well, the DJIA closed at 30,303.37 on December 17, 2020, its highest value to date. If one were to look at the intra-annual variation in the DJIA values, 2020 ranks 11th. However, except for 2008, all other years with the highest year-on-year variation occurred before World War II.
Global policy uncertainty also peaked in 2020
While the financial and commodity markets are largely driven by speculation, not all the volatility in 2020 can be attributed to profit-driven speculation. The Global Economic Policy Uncertainty Index, which quantifies media coverage of policy-related economic uncertainty, hit an all-time high of 423.84 in May this year. This suggests that uncertainty in markets and policy making circles perhaps fed into each other. While it has declined significantly since then, the last available value for October 2020 was still higher than that of late 2019 or early 2020.