Coronavirus Crash: Five reasons why markets are in full panic mode and why it is here to stay

Long gone are the days of low volatility – it is so high that trading has been halted on Wall Street. The rare move was triggered after stocks fell by 7% at the open. Markets had already declined in the past two weeks and have also seen the occasional upside days last week. 

Five factors are making it different this time.

1) High uncertainty causes a mentality change

Why is the death rate low in South Korea and high in Italy? Are there different strains of the Covid-19? Can we trust Chinese figures? Is this just the flu or much worse? These questions – which were prevalent from the outset – continue puzzling the public.

Moreover, trying to forecast the trajectory of the global economy becomes harder as events develop at a break-neck speed. Analysts dismissed a US recession, and now there are growing individual voices. However, some see only a temporary shock followed by a V-shaped recovery. 

"When in doubt, stay out" is probably the mentality of many investors, small and large alike. The "buy the dip" approach has disappeared, and it will take time to return to that. It is hard to detect the bottom in the sell-off. 

2) Italy is worrying, and it is not alone

The Italian government locked down 16 million people, including Milan, its second city. The drastic measures – which include the industrial heartland – are causing chaos. The outbreak of Covid-19 in Italy triggered the initial sell-off in late February. 

Previously, the eurozone's third-largest economy shut down schools and universities. Spain followed through by calling off studies in Vitoria, the regional capital of the Basque country.

Parents who are trying to work at home may find it hard when their kids are around – and working from home is not an option available to everybody. 

Will other countries follow? France banned events with over 1,000 people, and other countries may consider similar steps as the disease spreads across the old continent. That may further weigh on the global economy. 

3) Slow US response

The world's largest economy has had issues with testing kits for coronavirus and is catching up only now. It has also refrained from transport limits, and most large events continue as planned.

Moreover, President Donald Trump has been dismissing the damage from the disease and offering only limited measures such as providing paid sick leave. His desire not to see a cruise ship dock in an American port to keep the numbers low has not inspired confidence, nor has his delegation of the crisis to Vice President Mike Pence. 

Many suspect that once testing is ramped up, the number of infections and the economic fallout would surge. Additional cases in New York City may trigger the shutdown of the subway, paralyzing the city. And that is only one example.

4) The inability of central banks to act

The Federal Reserve's emergency rate cut had a limited positive effect and only opened markets' thirst for more moves. Bond markets see US rates falling to zero by the summer. The Fed is one of the only central banks that has ammunition – it entered the crisis with an interest rate of 1.75%.

The Bank of England's borrowing costs are only 0.75%, the European Central Bank's deposit rate is -0.50%. And in Japan, the interest rate is negative at -0.10 as well.

Moreover, interest rate cuts are useless as they encourage spending, but they cannot convince people to buy flight tickets, go out to restaurants, and drive cars. Moreover, factory shutdowns cause a supply shock, and lower rates only address demand. 

While the Fed can continue cutting rates, there is little hope that prevents a further fall as cutting rates modestly help the economy. Once that tool is exhausted, despair could send stocks even lower. 

5) Exacerbated by oil 

The prospects of people staying indoors and refraining from travel weighed heavily on oil prices. Saudi Arabia and Russia, which were cooperating to cap production and keep prices higher, have fallen out on Friday. The Saudis took the extra step in launching an all-out price war with Russia, lowering its rates for the black gold and ramping out production.

The move has sent oil prices tumbling down, and it could yet have greater damage. Shales produces in the US have higher breakeven prices and may be forced to shut down their operations. While a drop in US oil rigs will eventually push petrol prices higher, it could weigh on the economy and put pressure on manufacturing. 

Conclusion

The coronavirus crash is based on developments that are here to stay and may continue weighing on stocks. Finding a bottom may take time. 

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