The current situation in the financial markets is reminiscent of what happened between 2007 and 2009, i.e. the massive drops in stock indices that were unstoppable. At that time, the S&P 500 also fell by over 50%. Although today the decreases reach 20%, only the pace of change is higher and the situation is completely different.
The chart is similar to that of a decade ago, but the reason for the decrease is not the bursting of the real estate bubble, but rather global halting of the economy. Quarantines, closed schools, cinemas, people afraid to go to restaurants and shops for items other than those that are necessary, a definite reduction in travel and transport in general, canceled sporting events, conferences or fairs. It all looks as if a speeding motorcycle suddenly came across a high curb. Not only did the motorcycle stop, but it crashed and turned several times. This is how economies can look like after a clash with coronavirus.
It is not difficult to imagine the consequences of the protracted global quarantine in the form of the collapse of many enterprises, which in turn may be associated with a global increase in unemployment. This, in turn, may result in worse public sentiment. Such a scenario may currently discount financial markets due to substantial and very rapid decline of indices. Only today contracts for American indices fall by 5%, the German stock exchange and DAX index lose at a similar level. Nevertheless, as long as the exchanges operate, and there are voices about their suspension, they also give you the opportunity to trade for price drops, including CFDs.
Economies want to be saved by central banks. Therefore, today the decision of the European Central Bank will be very important. According to consensus, interest rates are not expected to change, but the ECB may, and in principle must use appropriate tools to save companies from bankruptcy. These may be further targeted refinancing operations together with the purchase of appropriately selected corporate bonds, for which the terms may be significantly loosened. The expectations are huge because the scale is huge. ECB decision today (March 12) at 13:45 and the conference at 14:30.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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