After spending much of the past decade on hold, fear has returned with revenge in the markets. Motley traders returning to their offices on Monday will be prepared for greater volatility after the sale of global stocks last week, the largest since the depths of the financial crisis in 2008. Growing concerns about the rapid spread of the coronavirus have caused the One of the fastest market corrections in the US benchmark S&P 500 since the Great Depression in the 1930s.
The rapidity of the decline in stocks suggests that there may be reasons to rebound in the coming days, but it also points out that the markets have been rolling since a fall. Investors, accustomed to an environment of persistently low interest rates and cheap central bank money, had become complacent and ignored the growing signs of an economic slowdown. Stocks, especially US tech stocks, had started to overvalue. A review was expected before the appearance of the coronavirus. The market rout has been amplified by the growing dominance of passive index funds as well as by algorithmic trading.
Previous sales in response to a global health epidemic provide little information on market trends. A recent assessment of the market impact of past epidemics by JPMorgan, including Sars and swine flu, found that a sharp initial drop in the stock market quickly gave way to a recovery. There is no certainty that a similar rebound will occur this time. There are new concerns about the increased risk of a global recession. On Friday, the yield on the 10-year US Treasury note fell below 1.2% for the first time to 1.167% as investors sought refuge. Goldman Sachs has warned that profits for US companies will stagnate this year.
The coronavirus epidemic – and the global political response to this crisis – is creating a negative supply and demand shock that will reduce growth. Strong consumer activity supported the US and eurozone economies. Restricting travel, closing schools and isolating entire communities will have an inevitable effect on spending.
Given the already low borrowing rates, monetary policy is limited in what it can do to support weakening demand and avoid liquidity problems. Last week, Christine Lagarde downplayed the chances of the European Central Bank to provide an imminent response to the virus. Mark Carney, outgoing Governor of the Bank of England, said Britain should prepare for worsening economic growth. The Federal Reserve said it was ready to act on Friday.
Despite the constraints, policy makers may need to deploy non-standard monetary policy tools. South Korea’s central bank decided last week not to lower its benchmark interest rate but noted that a more effective response at this stage was targeted support to the sectors and businesses most affected by the virus .
Credit markets and future debt reversals should be a priority area. Corporate debt has skyrocketed over the past decade. A first test could take place at the beginning of June when some 200 billion dollars of debt will mature in the sectors most exposed to a slowdown. Airlines and travel groups in particular fear losing business during the summer season.
Longer-term economic benefits remain the big unknown. The number of new cases in China appears to have decreased, but in Europe and elsewhere it has continued to increase. The concern is that the rout of the market will turn into a credit crunch. If this seems likely, decision-makers must show that they are ready to take decisive action.
After spending much of the past decade on hold, fear has returned with revenge in the markets. Motley traders returning to their offices on Monday will be prepared for greater volatility after the sale of global stocks last week, the largest since the depths of the financial crisis in 2008. Growing concerns about the rapid spread of the coronavirus have caused the One of the fastest market corrections in the US benchmark S&P 500 since the Great Depression in the 1930s.
The rapidity of the decline in stocks suggests that there may be reasons to rebound in the coming days, but it also points out that the markets have been rolling since a fall. Investors, accustomed to an environment of persistently low interest rates and cheap central bank money, had become complacent and ignored the growing signs of an economic slowdown. Stocks, especially US tech stocks, had started to overvalue. A review was expected before the appearance of the coronavirus. The market rout has been amplified by the growing dominance of passive index funds as well as by algorithmic trading.
Previous sales in response to a global health epidemic provide little information on market trends. A recent assessment of the market impact of past epidemics by JPMorgan, including Sars and swine flu, found that a sharp initial drop in the stock market quickly gave way to a recovery. There is no certainty that a similar rebound will occur this time. There are new concerns about the increased risk of a global recession. On Friday, the yield on the 10-year US Treasury note fell below 1.2% for the first time to 1.167% as investors sought refuge. Goldman Sachs has warned that profits for US companies will stagnate this year.
The coronavirus epidemic – and the global political response to this crisis – is creating a negative supply and demand shock that will reduce growth. Strong consumer activity supported the US and eurozone economies. Restricting travel, closing schools and isolating entire communities will have an inevitable effect on spending.
Given the already low borrowing rates, monetary policy is limited in what it can do to support weakening demand and avoid liquidity problems. Last week, Christine Lagarde downplayed the chances of the European Central Bank to provide an imminent response to the virus. Mark Carney, outgoing Governor of the Bank of England, said Britain should prepare for worsening economic growth. The Federal Reserve said it was ready to act on Friday.
Despite the constraints, policy makers may need to deploy non-standard monetary policy tools. South Korea’s central bank decided last week not to lower its benchmark interest rate but noted that a more effective response at this stage was targeted support to the sectors and businesses most affected by the virus .
Credit markets and future debt reversals should be a priority area. Corporate debt has skyrocketed over the past decade. A first test could take place at the beginning of June when some 200 billion dollars of debt will mature in the sectors most exposed to a slowdown. Airlines and travel groups in particular fear losing business during the summer season.
Longer-term economic benefits remain the big unknown. The number of new cases in China appears to have decreased, but in Europe and elsewhere it has continued to increase. The concern is that the rout of the market will turn into a credit crunch. If this seems likely, decision-makers must show that they are ready to take decisive action.