Already put to the test by the spread of the coronavirus, the world’s financial centers gave in to panic on Monday. In addition to the health crisis, there is now the oil crash. A barrel of brent oil lost more than 20% and fell below $ 36 on Monday after the breakdown of negotiations between OPEC and Russia.
“Bear Market”
Bloomberg screens scrutinized by stock traders remained hopelessly red on Monday. European indices plunged from 7 to 8%, tilting the market into “bearish” territory. With declines of more than 20% since the peaks at the end of February, the “bear market” is back. In the jargon of stock market operators, the bear symbolizes the pessimism of the markets. Unlike the bull (emblem of the bull market) which charges and, self-assured, pushes the markets up, the bear kicks in a movement from top to bottom.
Just three weeks ago, such a rout would have been unimaginable. The European index EuroSTOXX 50 plunged 11.17%, the DAX in Frankfurt by 7.42% and the FTSE 100 in London by 7.25%. The Italian stock market, which has lost 17% since the start of the health crisis, opened in free fall with an hour late. The Milanese MIB finally ended the session at -8.45%.
The Paris Bourse almost wiped out 2019
In Paris, the stock market opened a few minutes late Monday morning, the time that the stock market operator adjusted the opening price of certain securities massively reserved downward. Between its peak of 6,111 points on February 19 and the close of Monday at 4,707.91 points, the CAC 40 lost almost 23%. In one session, the Paris index plunged 8.39%. An exceptional fall. The last of this magnitude date back to 2008: on October 10, the Paris Stock Exchange had lost 7.73% and four days earlier, it had dropped 9.04% in a single session.
The Paris flagship index is now at its lowest level since January 2019 and at 4,600 points it will have wiped out all of the gains of last year. The Banque de France has announced that it only expects GDP growth of 0.1% in the first quarter. The banking sector, like the French oil groups, is hard hit.
Circuit breakers activated
Market operators are forced to activate circuit breakers to avoid breakup. At the opening of Wall Street, trade had to be suspended 15 minutes, after the collapse of 7% of the broad S & P 500 index. At the time of the interruption, the Dow Jones Industrial Average had already collapsed by 7.29% and the Nasdaq, with strong technological coloring, had tumbled by 6.86%.
In this highly uncertain environment, market gurus advise investors not to try to catch “falling knives”. In a video published by the Bloomberg agency, the highly respected Mohamed El-Erian, economic advisor at Allianz, launched a rare recommendation: “do not buy in this dip” (do not buy during this trough). In other words, this is not the time to be tempted by cheap purchases. The uncertainty surrounding this crisis makes the operation risky, according to the economist.
Volatility, already significantly higher in the past 15 days, has further increased. The VIX, the volatility index of the S&P 500, sometimes called the “fear index”, crossed 60 points in session on Monday after having exceeded 50 on Friday. “The market climate is comparable to that of last August or the last quarter of 2018, but it is not yet 2008”, relativizes Dominique Ceolin at ABC Arbitrage. For him, we must distinguish the occasional volatility shocks from stabilized regimes, as in 2008. The VIX then had peaks at 80 and stabilized around 40-50.
The problem with such a stock market rout? It can “lead to a serious economic crisis,” warns Stéphane Déo, head of market strategy at LBPAM. Via two weak links: the money market and the high yield credit market in the United States.
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