5 reasons why the Norwegian market is in a liquidity squeeze

Share prices are falling, the Norwegian krone is plummeting and the risk premiums in the fixed income market are increasing. This we have seen before.

What is new is not only how fast it has all happened, but also the reasons why.

We have had event-driven shocks in the market in the past as well, such as wars, oil price shocks or terrorist attacks. However, it is more than a hundred years since last a pandemic virus, the Spanish flu, hit the economy. Very few saw the coronavirus coming, and how hard it would hit the economy and the markets.

The result of the turmoil is that there is a lack of money in the financial markets and this is also why governments and central banks are coming to the rescue.

Five reasons why liquidity in the Norwegian market has weakened:

The authorities in Norway, like in most European countries, have ordered their inhabitants to stay at home as much as possible to prevent an exponential spread of the coronavirus. Shops have closed or have very limited opening hours, schools have introduced homeschooling, social events, as well as concerts and sports events, are banned, and our borders are closed.

A lot of companies lose revenue, employees are laid off and the result is – predictably – falling share prices.

As economic activity has declined due to the virus, the demand for oil is also reduced. Lower demand leads to lower oil prices. On top of this, Saudi Arabia launched an oil price war to hit the oil production in Russia and the US by increasing its supply. Lower demand and higher supply caused oil prices to plunge.

Norway is an oil-fueled economy where our currency often reacts in tandem with the oil price. As the price of a barrel of North Sea crude oil fell nearly 30 per cent overnight on the 8th of March, we woke up to an even weaker currency, making Norwegian investments less attractive to foreign investors.