Dow Jones and Other Markets Collapse amid Coronavirus
Several hours after the early Thursday trading session, Dow Jones fell 7.9%, amounting to a nearly 28% loss from its last peak. The index dropped around 1,869.19 points and is currently trading with 21,680.32. DJIA was hit just weeks ago but is now nearing its most significant drop since 2008. At the lastest check, Dow is down 9.5%, losing 2,245 points at 21,309.
The World Health Organization has declared COVID-19 as a pandemic, which prompted the rapid collapse of the industrial index. Such an enormous drop had not happened since the 2008 great recession when the blue-chip index erased $11 trillion from stock portfolios. In 2008, Dow Jones lost about 34% of its value, the lowest point it has ever reached.
The most massive stock plunge among the components of DJIA is Boeing Co., with an 18% loss since Monday. The American carrier reportedly planned to draw down a $13.8 billion credit line to shore up its cash position amid the coronavirus outbreak. Boeing also said that it lost numerous orders for its grounded 737 Max.
The biggest companies that dragged the index down to huge losses were Boeing, Dow Inc., IBM, Nike, and Disney. Boeing contributed 14.33% to the index’s intraday decline, while Dow Inc. slipped 12.7%. The two companies combined a roughly 203-point drag on DJIA.
IBM plunged 11.65%, while Nike and Disney lost 11.01% and 11.09%, respectively.
Trump Speech Spooks the Market Following a Travel Ban
US President Donald Trump failed to ease the markets over potential economic fallout from the coronavirus pandemic. Trump announced a travel ban from Europe for 30 days, which triggered alarm among investors.
On Wednesday, Trump announced that travel from Europe to the US would be suspended for 30 days. This decision was part of the government’s response to the coronavirus outbreak. Trump also stated the administration would give financial relief to workers with the virus. These people include those who are quarantined due to the infection and those who are merely monitoring the infected.
According to the Twitter statement of Gérard Araud, the former ambassador of France, relating to the United States, “Trump needed a narrative to exonerate his administration from any responsibility in the crisis. The foreigner is always a good scapegoat. The Chinese have already been used. So, let’s take the European, not any Europe, the EU-one.”
The EU condemned Trump’s ban, while several European nations imposed radical efforts that disrupted the daily lives of their citizens. France, Ireland, Belgium, Austria, Turkey, and Norway also joined those countries closing schools, universities, and kindergartens.
Travelers hurriedly rebooked flights, and global markets went to their knees after the Schengen zone-wide travel ban.
Ursula Von der Leyen and Charles Michel offered some strong words for the US president: “The coronavirus is a global crisis, not limited to any continent and requires cooperation rather than unilateral action.”
The Biggest Market Collapse since 1987’s Black Monday
In the aftermath of the announcement, the Euro STOXX 600, which gauges all stock markets all over Europe, lost a staggering 11.48%. That’s the worst loss in its history since it launched in 1998. Since its all-time high on February 19, the STOXX 600 has lost 2.7 trillion pounds from its previous value.
The FTSE 100 index of the top UK companies lost a whopping 10.87%, which is its second-biggest drop on record. This drop puts the total losses of the London markets since mid-February to more than 549 billion pounds.
The index finished the trading day down more than 600 points at 5.237, which is its lowest level since 2012. Shares in France and Germany plunged by 12%, while Spain and Italy lost 14% and 17%, respectively, also their worst-day ever.
Over in the US, after-hours trading wasn’t notably different. Dow futures dropped 360 points, or 1.7% after hours. The S&P 500 futures slipped about 1.5%, while the NASDAQ futures declined by about 2.1%.
Thursday saw the S&P500 enter bear market territory. A day after this, all three of the leading Wall Street indices are now in the bear market.
The rampaging bear market doesn’t stop there. In Asia, markets plunged early on in the trade. Japan’s Nikkei lost more than 9%, while Australia’s S&P/ASX 200 declined 8%. These two benchmarks have been in the bear territory since the start of the week. South Korea’s KOSPI isn’t any different, losing 7% and heading towards its lowest levels since 2011. By the end of Friday, the index is also expected to be in the bear’s lair, joining other global markets. Hong Kong’s Hang Seng index lost 6.7%, and China’s Shanghai Composite shed 4%.
In the words of market analysts, the day has been “utterly brutal.”
US Federal Reserve Injects a $1.5 Trillion Stimulus
This “utterly brutal” trail of events compelled the US Federal Reserve to spring into action. The New York Fed said it was ramping up assets purchases amid the turmoil. This decision marks a second consecutive day intervention from the bank the third time in the week.
Under the new effort, the Fed will purchase “across a range of maturities,” including bills, notes, Treasury Inflation-Protected Securities, and other instruments. It started on Thursday and will continue through April 13. Then, in the second part, the Fed offers $500 billion in a three-month repo operation. The Fed will continue to provide at least $175 billion in overnight repos and $45 billion in two-week transactions.
Markets and index investors have been looking to the Fed to take action. The US central bank implemented an emergency 50-basis-point rate cut last week, but the effects of that cut have fizzled out. On Monday, it increased its ongoing repo operations, and on Wednesday, it expanded the limits on an announced $50 billion term offering.
A Repeat of the 2008 Financial Crisis?
The Dow’s plunge along with other indices and markets conjure up the memories of the 2008 financial crisis, which inevitably led to a massive global recession. But just how similar or different are the 2008 financial crisis and this year’s market crashes induced by the coronavirus pandemic?
According to one expert, the current situation is “not like the great financial crisis. It’s not like the dot-com bubble. It’s like both at the same time.”
Chamath Palihapitiya, founder and CEO of Social Capital and an early Facebook executive, said this market turmoil has the “severity and the depth of the great financial crisis and the long period of the dot-com bubble.”
But another expert offers a different perspective. According to Gus Faucher, an economist, a recession is “inevitable,” but it’s likely to be “brief and much less severe than the Great Recession.” According to him, the 2008 financial crisis and subsequent recession came after years of deeply rooted vulnerabilities in the economy. This market downturn the world is witnessing, meanwhile, has been triggered only by quite recent events, including the COVID-19 pandemic and central banks’ failures to prop up significant economies. However, it’s also worth mentioning that the US-China trade war, OPEC+ curbs, US-Iran tensions, and the Brexit saga have been dampening market sentiment for years.
Still, Faucher says the situation is caused by external factors, describing it as something resembling a “natural disaster.”
The Great Recession of 2008
The Great Recession of 2008 came after an overheated housing market started crumbling in on itself. Banks and lenders even approved mortgages for unqualified entities and individuals. House prices went through the roof and rose to stellar levels. Then, the banks turned the mortgages into securities and sold them to other financial institutions.
So, when home prices spiraled down, millions stopped making payments, and banks were near bankruptcy levels. People lost their jobs, consumer spending fell, and bank lending was practically non-existent. The economy ground to a halt and markets to collapse. The problem had been swelling up for years, and when it burst, it burst wildly.
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Market Crashes of 2020
Meanwhile, this year’s turmoil has been triggered by the coronavirus fiasco originating in China. More than 100,000 cases worldwide exist, with the death toll exceeding 4,000. The US has recorded more than 800 people infections, while 28 have died.
So far, the economic impacts are limited, since far fewer people are affected than when the housing crisis was raging on. Travel and tourism are suffering. At the very same time, manufacturing and retail from China are experiencing disruptions. Stores could be empty, and supply chains might have trouble continuing operations.
What about the Oil Market?
Perhaps the most striking difference between then and now is the oil market’s appearance within the bigger picture. Oil prices are tumbling. While the latest trigger has been the possible price war between Saudi Arabia and Russia, but the underlying reasons can be traced back again to the coronavirus.
While Trump was banning European travels and the Dow has been in a freefall, an epic battle is taking place in the oil markets. US crude lost another 6% to $31 per barrel after Trump’s travel ban. Crude dropped to as low as $30.02 per barrel. So far, in the week, prices are down 27%.
Russia has been trying to stop the rise of US shale oil. As a result, it refused to agree with OPEC’s proposal of making deeper cuts in production. So, Saudi Arabia, the de facto leader of OPEC, retaliated and pledged to flood the markets with cheap oil.
It wasn’t welcome news for the oil market, because investors were already fleeing from risky assets, which include commodities like oil.
Market Collapse – What’s Next?
At present, it is most uncertain whether the collapse in the Dow and other markets will transform into something worse. However, it will surely depend on what the world’s top banks and institutions will do to restrain the coronavirus crisis from growing any further.
Just like 2008, banks and governments are flooding markets with liquidity. But the markets are already saturated with cash, and interest rate cuts aren’t helping anymore. What others are suggesting is international cooperation instead of unilateral actions.
If the pandemic and financial crisis persist, supply chains will break, manufacturing businesses will close, and worker quarantines will disrupt the economy. Demand will shrink further, and growth will be negative.
Unless international cooperation is achieved for the long term, the current crisis will not be solved anytime soon, according to the experts at least. Even if it’s resolved, a similar crisis is bound to happen if world authorities, governments, and, yes, financial markets, don’t learn.
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