COVID-19 Hit the Markets Hard — You Can’t Quarantine a Stock Market

COVID-19 Hit the Markets Hard — You Can’t Quarantine a Stock Market

You can’t quarantine a stock market, can you? So you’d expect the markets to struggle. But this week’s action was a little weird.

Almost two months into the COVID-19 story and markets around the world suddenly take a spectacular hit…

What changed? Why the sudden plunge and panic?

Coronavirus isn’t new. The rate of infection hasn’t suddenly surged. In fact, it’s supposedly slowing inside China. And fatality rates are supposedly small too.

Supposedly…

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Are markets ‘buying into’ the conspiracy theories of manipulated Chinese statistics? Are they telling you that the pandemic is worse than the government is admitting?

Or perhaps it’s the renaming of coronavirus into COVID-19 — much scarier sounding. The name COVID-19 went viral about a week ago, when markets turned down. God only knows what would’ve happened if the disease had struck a day later and been named COVID-20.

Then there’s Japan and China’s decision to send home all school children — they’re sure to wreak havoc on those economies.

Or perhaps it’s the increasing spread of the virus out of China that has people worried. Italy and South Korea are top of the coronavirus newsfeed now. But the list of countries is growing rapidly.

Twitterverse reports a supermarket in Milan was cleaned out by customers impressively quickly. Venice’s Carnival was cancelled. The Italian stock market plunged early in the week.

Australians initially cleared by Japanese authorities tested positive in Australia. A Chinese company’s Aussie mining site has been quarantining their staff in Western Australia, according to Twitter rumours.

My sister-in-law works in the tour guide industry here in London. Reports and complaints of racism are spiking. There’s nothing like telling a Japanese tourist to go back to China, let me tell you…

So the financial panic could be based on the pandemic fears — the risk to you and me on the ground. Perhaps people are selling stocks because they’re human.

Or perhaps investors have realised that company performance is about to take a hit. Production cuts, missing component parts, and a lack of shoppers means less earnings. Dividends cuts, dilutions, and conversions are coming down the pipeline. This week’s batch of profit warnings were just the beginning.

The Financial Times reports that global manufacturing inventories were at seven-year lows before COVID-19 hit. In other words, supply chains were wonderfully efficient. And fragile…it only takes one missing part to shut down a production line.

But why this week? I don’t think anything suddenly changed for companies around the world, did it?

So perhaps it’s the realisation that coming economic data will disappoint. There’s talk of the impossible — the Chinese economy shrinking for a quarter.

This is an especially plausible explanation for the recent plunge because the impact of COVID-19 is going to take a long time to emerge. Not just because of infection rates playing out over time, but because economic data isn’t published often. We’re only two months into the crisis, remember.

If the virus lasts long enough to mess with the published economic data, markets will move in the future. Only, the market prices in those moves ahead of time. And perhaps that’s what has dawned on everyone this week.

One more ‘perhaps’ for you to consider. Perhaps we’re asking the wrong question altogether…

With QE keeping financial markets inflated, it’s the central bankers who set the agenda these days. Every economic data plunge has its corresponding amount of QE to offset it. So markets don’t need to go down.

Right?

Well, maybe not. Maybe that’s what makes COVID-19 look so dangerous. The fact that it managed to cast doubt on central banker omniscience, omnipotence, and omnipresence.

Coronavirus is coming up against the big issue of our age — does money printing work? Are you a believer?

QE seems to work well on banking crises and sovereign debt crises, we’ve discovered. But does it work on pandemics?

By ‘work’ I don’t mean curing patients, of course. I mean dealing with the symptoms they give financial markets. Like those in the news this week. Stock prices cough, splutter, and collapse.

Can financial markets levitate, high on QE, as the real economy drops away thanks to an economic contraction? Or as companies take financial hits? Or as people on the street panic?

I used to be convinced central bankers could offset all that, within financial markets. Mostly because central bankers have an unlimited budget and aren’t afraid to buy the assets you see reported on the nightly news.

It recently emerged that European central bankers financed the wealthiest man in France’s purchase of iconic US brand Tiffany & Co under its bond purchase program. The Europeans are literally printing money and buying US trophy assets.

How can there be a crash under those circumstances?

Well, that is what we may be about to find out, given markets are plunging.

Perhaps COVID-19 has popped the central banking bubble.

I can’t help wondering what the feedback loops are though. Why exactly are financial markets falling given central bankers are guaranteeing to pump them back up?

We’re back to my long list of ‘perhapses’ above. Is it the fear of a financial crisis? Fear of a recession? Fear of social breakdown? Fear of infection?

If, like me, you accept that central bankers have a lot of control over asset prices, it must be something outside of their control which is causing markets to plunge.

Politics perhaps — will COVID-19 undermine political stability in China, the EU’s open borders, or Italy’s ramshackle coalition government? That’d cause a proper and lasting hit.

What’s clear is that COVID-19 suddenly matters, for whatever reason. And it’s unlikely to go away anytime soon, even if it does become more predictable. There are too many uncertainties yet to unfold.

Until next time,

Nick Hubble Signature

Nick Hubble,
For The Daily Reckoning Australia

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