Pandemic Fear Without Prescription... Global Stock Markets Chain Crash Becoming the 'New Normal'

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] In the phase of the spread of the novel coronavirus infection (COVID-19), the chain collapse of global stock markets has virtually become the 'new normal.' Despite the central banks' successive bold measures, investors' anxiety over the prolonged situation due to border closures and factory shutdowns in the US, Europe, and other regions is increasing market volatility. As analyses suggest that the COVID-19 spread has not yet peaked, the timing of containment is expected to determine the economic outlook.

According to Bloomberg on the 16th (local time), the Dow Jones Industrial Average, which had risen to 29,551 on the 12th of last month, nearing the 30,000 mark, is now threatened to fall below the 20,000 level in just over a month. The market leans toward a retreat to the 10,000 range. Although a sharp rebound on the 13th raised hopes for recovery, it quickly collapsed again. The plunge was anticipated right at the opening. Immediately after the market opened at 9:30 a.m., the S&P 500 index dropped more than 7%, triggering a temporary trading halt via the circuit breaker.

The sharp fluctuations in stock prices are predominantly interpreted as a reflection of uncertainty. With COVID-19 continuing to spread, it is impossible to predict how much economic damage travel restrictions, social distancing measures, and supply chain disruptions will cause, and vague anxiety is causing market turmoil. A foreign media outlet pointed out, "New information such as a COVID-19 vaccine or lower-than-expected infection rates will help lift stock prices."

The Chicago Board Options Exchange (CBOE) VIX index, known as the 'fear index,' recorded 82.69 on the day, surpassing the 80.86 recorded on November 20, 2008, during the global financial crisis. Despite the US Federal Reserve (Fed) urgently cutting the benchmark interest rate by 100 basis points (1bp = 0.01 percentage points) on Sunday night and purchasing $700 billion worth of government bonds and mortgage-backed securities (MBS), the VIX index rose 43% in a single day, rendering these efforts ineffective.

In particular, since this COVID-19 crisis did not start with a credit crunch in the financial sector like the 2008 global financial crisis but began with an epidemic outbreak in China leading to supply and demand shocks, it is expected that the market's plunge will continue unless the epidemic spread is contained. According to the World Health Organization (WHO), more than 7,500 new COVID-19 cases were reported in just one day in four European countries: Italy, Spain, Germany, and France. In the US, cases have exceeded 4,000, and the spread continues in Africa and Latin America. Following Italy and Spain, other European and Latin American countries are considering and announcing border closures one after another.

The Dow Jones index continued its high ascent and reached an all-time high from January to mid-February when COVID-19 was spreading within China. At that time, the dominant view was that once COVID-19 was contained in China, the global supply chain would return to normal operation, and the economy would recover in a V-shaped curve. However, COVID-19 rapidly spread worldwide via hubs in South Korea, Italy, and Iran, and the Dow Jones and New York stock markets gradually deepened their declines. The chain decline extended to Asian and European stock markets and has continued for over 20 days.

This stock market plunge is likely to continue until the spread of COVID-19 is curbed. Fiat Chrysler Automobiles (FCA) announced it will suspend operations at six FCA and Maserati plants in Italy, as well as plants in Serbia and Poland, until the 27th. Brembo, which supplies brakes to luxury brands like Maserati, is also closing four plants in Italy.

Experts emphasize that the only way to stop the chain collapse of the stock market is to contain the spread of COVID-19. Patrick Hillery, founder of Caliber Partners, said, "Whatever the Fed has done or can do does not matter," adding, "Trading in the market will reflect fear and uncertainty." He pointed out, "The only thing that can calm the market is a decrease in the number of COVID-19 cases." WHO Director-General Tedros Adhanom Ghebreyesus also reiterated at a press conference that "the simple message we send to all countries is 'test, test, test.'" He emphasized, "Test all suspected cases, isolate those who test positive, and trace and test people who had close contact with them from two days before symptoms appeared."

Olivier Blanchard, senior fellow at the Peterson Institute for International Economics, said, "Whether the COVID-19 epidemic peaks in the second half of this year will determine whether there will be a global recession." Raguram Rajan, a world-renowned economist and professor at the University of Chicago, also pointed out, "If authorities' will to contain the epidemic is weak, the economic shock will inevitably deepen."

This content was produced with the assistance of AI translation services.