The corona virus has long since reached the financial markets. Rarely has Wall Street started a week with so much uncertainty. Will the days come a recovery of the courses or will everything only get worse? That’s the big question. In any case, the past week was the worst for the financial markets since the 2008 crisis. Dealer screens turned deep red – the color that shows losses.
The S&P 500, the stock index that unites the 500 largest and most important US companies, lost over four trillion dollars in just seven trading days. For comparison: this corresponds to Germany’s gross domestic product. And it wasn’t just stocks that crashed. Raw materials such as copper, aluminum and zinc also collapsed. The oil price fell below $ 50, not even gold, which is otherwise considered a safe haven, was spared. There was talk of a “pandemic panic”. And more and more often from a second Lehman Brothers.
However, there are differences from the panic that followed the bankruptcy of the investment bank in September 2008. Back then, it was a bad development in the financial sector that led to a crisis in the real economy. This time it is the other way round: concerns that the pandemic could lead to a recession are causing prices to plummet. However, the sudden violent reaction on Wall Street is comparable in both cases.
Just ten days ago, the S&P 500 had reached a new record high. The corona virus had already killed hundreds of people and infected tens of thousands at the time. But investors mainly saw it as a problem for China. Many even hoped that Corona would provide a new wave of cheap money through central banks. It actually looks like that. The People’s Bank of China has already cut rates, and Fed chief Jay Powell has also signaled that the US Federal Reserve is ready to prevent the worst.
Parallels to the Lehman bankruptcy
Last week there was nothing left of this serenity. The news that Covid-19 had reached Italy certainly contributed to this. But the virus had previously spread to South Korea and Iran – which had hardly touched the markets. The mood change came practically overnight. This is a pattern that can always be found on the financial markets.
At Lehman, too, there had been indications of problems at the bank months before the collapse. However, the end came surprisingly on that fateful Friday when no bank trading partner wanted to advance more funds. The situation was similar with the euro crisis. For example, investors lent money to the Greek government for years by buying its bonds. They did so because they believed that the German government and the rest of the EU would step in if Greece could no longer pay. But when the Greek government drastically increased its government debt figures in autumn 2009, investors were no longer so sure. The risk premium on Greek government bonds promptly shot up: the euro crisis began.
But Wall Street has rarely seen the speed at which the corona pandemic turned. You have to go back to 1929 to find a comparable crash. The real danger lies in this – and not in the heavy losses per se. Because a large part of the market participants borrowed the money from which shares, bonds or derivatives are bought. To satisfy their creditors, they have to sell assets. This intensifies the waves of sales and causes prices to fall further, which in turn means that even more market participants have to sell in order to be able to meet their payment obligations. A vicious circle that quickly grips areas of the capital market that are not directly threatened by the virus and its economic consequences.
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