This week a lot has happened in the global financial markets and the global stock markets have dropped significantly within a few days and the question that most people are asking is whether this drop will culminate in a global stock market collapse.
The Federal Reserve has been targeting the stock market as a way of boosting economic growth. They have been pumping billions of dollars into the stock market for many years and now, the prices are inflated. The current global panic as a result of the outbreak has triggered stock selling and this is what is causing the stocks prices to tumble every single day and in the process wealth worth billions of dollars is being lost.
In the past week, many global companies are reporting that the global supply chains are being affected by this global panic and the earnings are shrinking because of decreased consumer consumption. Asian markets have experienced a lot of equity selling and the Japanese Nikkei is down over 3 percent. Similar situation is happening in China and the Chinese stock market is also down as investors fear that the situation can get worse in the next few weeks. At the same time, the US futures have been rising in value as they are now cheaper to buy. The government has been pumping money to keep everything intact even if the real economy and the supply chains are have been slowed down by the ongoing fear. However, no one cares anyway; “please hold the panic” says the Wall Street journal. Yesterday the United States treasury secretary gladly overstepped his boundaries to say that the central bank will of course cut down the short term interest rates if the impact of the outbreak grows.
On the other side, much has also been happening in the global bond yields. The 10 years US Treasuries hit a low of 1.36 percent although we are now a little higher at 1.39 [percent along with the equity futures. The market is now expecting the Federal Reserve to cut interest rates later in the year. In the meantime, we just have around $40 billion in new Federal Reserve repo madness to tide up in the next few days.
In China, the stock market has also been hit hard by the epidemic and this has caused investors to panic. The Shanghai composite (SHCOMP) has lost more than 5.6 percent of its value in this week and this has been the worst performance by the index since April 2019. Various benchmark indexes in South Korea and Australia have also lost a significant percentage of their value. The European stock market too has suffered and the Germany index (DAX) has dropped by nearly 5 percent. When this is put into perspective, the global financial markets had their worse week since the global financial crisis. The MSCI index which tracks the share of some of the largest companies in the world has already lost 8.9 percentage decline of its value; this turns out to be the worst percentage drop since the October of 2008.
Major investors have been spooked by increase in the number of warnings from various global companies like Apple, Disney, Microsoft, IAG and others whose businesses have been hit by the outbreak. The outbreak has reduced the demands of various goods and services and at the same time the global supply systems are facing some disruptions. Major firms are reporting a reduction in business activities. It is very clear that the panic caused by this outbreak is really crushing businesses and financial markets. On Friday, IAG said that “ongoing uncertainty” over the outbreak’s potential impact and duration mean it’s not possible to quantify the total cost. Its shares dropped more than 8% in London. Baidu (BIDU) also said that their revenue could drop as much as 13% in the first quarter of 2020 compared to the same time last year. But what will happen next remains as an open question. “The situation in China is evolving,” Baidu said in a statement. “Business visibility is very limited in the near future because of the outbreak.
These warnings by various companies are just a small reflection of what is happening to some of the world’s biggest economies. Growth in China is expected to significantly slow down as well as in other economies like Japan and South Korea. On top of this outbreak, we have other economic problems like US-China trade war and this outbreak is worsening an already bad situation. According to the economists it Oxford University, if this panic continues, about $1 trillion will be could be wiped off the world economy and the global GDP which has been constantly growing, might experience a 0.1 percent decline. This might trigger an economic recession in China, the euro zone and in the United States.
Oil prices are also in a bear territory following the recent 20 percent decline of oil prices from the highs. This is because oil demand is drying up as more nations transition to clean sources of energy. The global brent and the brent crude futures have slid by more than 26 percent since early January this year to a price of $50.37 which is the lowest level we have seen for the last 14 months. The US oil futures are trading at the $45 per barrel level and this has been a nearly 29 percent drop from early January.
This correction in the stock markets has caused president Trump to react irrationally and his reaction is as though the stock market is in a big trouble and a big crash might be coming. Maybe the current sell off and lack of buying combined with high frequency trading systems might cause a big implosion. Since he took the office, president Trump has been pumping a lot of money in the stock market despite the fact that he called it a “big, fat, ugly bubble” in his presidential debate. Ironically, his administration has been blowing more air to the bubble. Although President Donald Trump is a big proponent when it comes to investing in the stock market, he is missing out on the fact that the markets don’t rise continuously. Corrections and crashes always happen and the price doesn’t go up on a straight line. Actually, if this were to happen, the stock market would cease to function.
It seems that the president is very afraid of the stock market collapse and the current correction seems to be a big concern to him to a point where he tweeted saying that the stock market looked good to him. Despite this, the selloff has continued and major US indexes have fallen thousands of points throughout the week. Trump also made another embarrassing attempt to resuscitate the condition in the stock market by tweeting that the US was very close to finding a vaccine for the current outbreak but a moment later this was slammed by the white house. The stock market has continued tanking and the question is why the president is so much concerned with what is happening in the markets? Probably a stock market collapse will lower his chances for reelection. However, his over reaction is not reasonable because the stock market will always experience these corrections after a big bull run. The logical explanation of this is that he has a big belief that the stock market is very fragile and that there is a very high risk of imploding especially because of the current panic that is being reflected in the markets across the world.
The investing world is mow dominated by technology and with the high frequency trading (HFT), the algorithms can easily cause a brutal flash crash especially at this point where the market has not experienced a major correction for a long time. Lately, the buybacks in the US stock market have slowed down and this makes the 1987 stock market crash become more likely because not many people are willing to buy stocks now because the market is highly overbought. Buybacks have been very vital to the US economy all the way from the great depression and since the 2008 financial crisis; corporations have been the biggest buyers of their own stocks.
There has also been a sharp increase of retail buyers in the stock market and this is something that is experienced especially when the markets are at their highs and every novice investor feels as if they will miss the next big push on the upside. Most retail investors come last and when the market collapses, usually they are the ones who are left holding their positions. Large volume of buying comes from institutional investors and the current decrease in buys shows that most of the big investors are bearish and expecting a market correction. This shortage of buyers combined with high frequency trading and overstretched valuation systems are making a crash seem very real in the near future.
Elsewhere, the Syria-Turkish conflict is escalating every single day with more soldiers dead and hundreds of thousands of people displaced. The US president Trump has just completed a big tour in India where with big hugs from the Indian Prime Minister Modi. This has caused a big geopolitical shift as US-India ties gets stronger. The two leaders have also agreed on major deals on trade and this had a big impact on the stock market. The white house has also been insisting that China should stick to the trade deal agreement as things continue escalating between the two countries. Even Bernie sanders has been talking about the US support to Taiwan. The global order is still teetering and this might cause and the markets have not yet paid attention to this. With the current social-economic instability, the markets are very fragile and it will not be a surprise if we see a further drop in the stock market.