As of February 24, 2020, the new cases of COVID-19 that increased drastically outside of China has caused another “Black Monday” in the global stock market. The U.S. indices dropped more than 3% on average. Dow Jones closed with -3.35% down, the biggest intraday drop over the past 2 years. Nasdaq closed with -3.71% down whereas S&P500 was -3.35% down. VIX, known as the fear index, spiked 45%, closed at 24.84. US$ 474 billion evaporated from the European stock market on Monday, Italy’s MIB tumbled 5.4% mired by COVID-19, the biggest daily drop since 2016. Europe’s STOXX 600 dropped -3.8%, Germany’s DAX dropped -4%, London’s FTSE dropped -3.34%, and France’s CAC-40 dropped -3.95%. It appears that the COVID-19 epidemic now is having significant impact to the global economy and stock market.
The market-sell off in the global stock was mainly attributed to the increasing fear in the market sentiment, as is the rise in its pricing following the impact of COVID-19 on the global economy. Although China’s economy experienced a temporary “pause” in the past one month as a result of the preventive measures that disrupted the global supply chain, it did not have much of an effect on China’s stock market given its investor optimistic outlook.
That being said, the global economy however would be majorly affected as COVID-19 continues to spread to Italy, Japan, Korea etc. According to unidentified sources, Monday’s sell off signifies that the market did not expect COVID-19 to become a major threat outside of China. This will cause businesses to reexamine their existing supply chain as well as future demand and profitability while investors reprice the values accordingly.
According to many analysts, the global stock market would eventually reprice itself to reflect the impact of public health issues towards economy. Plus, the quantitative easing has set Europe and U.S. stock market on a 10-year bull run since the global financial crisis. With the support from the Federal Reserve and the European Central Bank, the recent quantitative easing has pushed the U.S. and Europe stock market to new high, a step further into the bubble territory.
According to Chan Kung, Chief Research of ANBOUND, Dow Jones was unable to break past the 30,000 “resistance level”. The high stock prices have shaken investors’ confidence and any triggering events will easily cause a sell off. In a way, the COVID-19 outbreak has given the market a timely reason for a correction. As a matter of fact, some analysts remarked that the correction may result in a 20% to 25% downside within the next few months.
The bond and commodity market have clearly become the go-to safe havens now. Throughout corrections, the yield of higher grades sovereign debts in the U.S., Germany and France have been consistently creating new lows, whereas the yield of lower grades sovereign debt is picking up, such as Italy’s. Additionally, conventional safe-haven commodity such as gold, is consistently breaking a new high. This reflects the rush into low risk asset classes to hedge against the unpredictable “Black Swan” caused by COVID-19.
Judging by the current state of things, it looks like the direction in which the stock market is headed is largely determined by the state of COVID-19’s outbreak. Assuming the virus continues to spread in Europe, it is highly likely that another wave of correction will ensue, perhaps even resulting in a panic selling.
However, ANBOUND’s market observation shows there is limited room for further decline. This is mainly because regulators and policymakers may intervene if there is any further deterioration. Loretta Mester, CEO of the Federal Reserve Bank of Cleveland categorized COVID-19 as “high risk”. In her words, “It is tough to gauge the epidemic’s impact to the economy at this point of time, but I’ll monitor closely on this unconfirmed news sources.”
In fact, during the G20 summit, countries’ representatives were still discussing on fiscal and monetary easing for economic growth without taking into account of the pneumonia epidemic. This indicates that there’s no turning back for easing policies. If ever, COVID-19 does severely impact the economy, policymakers may further increase the degree of “double-easing” in order to maintain both the economic growth and the stock market’s stability. As of now at least, the market seems to be responding to that. This signifies the high probability of another rate cut in July. The Federal funds futures now has an 85% probability of a 0.25% rate cut before Fed’s July meeting this year, up from about 50% in the previous month.
Contrary to that, if the epidemic does not spread as quickly as anticipated, or with limited casualties, the market would resume to fundamentals. As such, if the U.S. and Europe’s economy do not deteriorate further, the market would recover given the environment of a “normalized” easing would boost liquidity. However, as it stands, the current situation is that the uncertainties of the epidemic may still put pressure on the U.S. and Europe stock market for the time being.
The recent corrections in the U.S. and Europe market alongside other markets is an indication that COVID-19 is truly a threat to the global economy and a definite impact to global stock market. As long as the development of COVID-19 remains uncertain, the stock market would remain under pressure as the market sentiment becomes risk-adverse.