What’s up? Finally, not much. Traders sell everything they think is risky as Covid-19, the disease caused by a new coronavirus, spreads. There are too many unknowns to calculate how much the virus will reduce corporate profits and economic growth, which means that investors are looking for security.
The US stock market was winning earlier this year as concerns about the epidemic intensified. That was reversed on February 20, when the S&P 500 began five days of consecutive decline, according to data from FactSet. Since then, things like oil and copper, which tend to be linked to economic growth, have fallen. Other risky assets like junk bonds and, well, bitcoin have also taken a spill. Gold and high-end government bonds are among the few assets that rally.
To put the stock market downturn in context, it should be noted that US stocks were trading at record levels this year.
“The crisis is hitting growth expectations, particularly in Asia and Germany, fears of a spreading pandemic, a supply chain leading to disruptions and some inflation at a time when certain stock markets were very expensive”, Sébastien Galy, senior macro strategist at Nordea Asset Management, wrote in an email. “Fears of a pandemic are probably exaggerated in Europe and the United States, but they are driving companies to readjust.”
Yields on high quality government bonds, which move in the opposite direction to prices, have steadily declined. Ten-year US treasury bills returned about 1.3%, a record high, compared to about 2.7% a year ago. Investors are willing to lose money by holding German and Swiss government bonds with similar maturities, which report -0.5% and -0.8% respectively, according to data from FactSet.
Traders are increasing their bets that the US Federal Reserve will cut interest rates in the coming months to keep the economy from slowing. The problem is that the central bank does not have a lot of ammunition to fight against a slowdown induced by a coronavirus. Policy makers aim for a rate of 1.50% to 1.75%, leaving little room for maneuver before rates hit zero. The ability of the Fed and other central banks to stimulate the economy when interest rates are already so low has been debated among economists.
Perhaps one of the biggest concerns for investors and regulators is the massive accumulation of corporate debt. Regulators in the U.S. and Europe have sounded the alarm over $ 3 trillion in leveraged loans – a vague term that refers to junk bonds and loans that pose a risk of default higher.
If coronavirus problems slow economic growth, it could trigger a series of failures among these companies, driving up unemployment and further weakening the economy. Investors Withdrawn $ 1.6 Billion From Popular Exchange Trash Bond Fund – iShares iBoxx USD High Yield Corporate Bond ETF During The Week Ended February 25, ETF Reports .com.
“In a world of very low interest rates, the threat will not be so great for high-rated and well-capitalized borrowers, but there are many others who have increased their debt over the past few years,” wrote Kit Juckes of Company. General in an email. . “As the virus spreads to more countries and more companies report supply chain problems, more companies will struggle.”