The Dow tumbled today with -10% and also other markets are in Krach territory, a decrease of more than 10% on one trading day: Amsterdam AEX -11%, Euro30 -11%, Frankfurt Dax -12%, and Paris Cac-40 -12%. For the Dow, AEX, and many other markets this has not happened since 1987. It’s seen as a panic reaction to Trump’s decision to close down air traffic between the two largest markets in the world: the US and Europe, and a too timid respons of the central banks in these two economic zones to contain the economic fallout of the Covid-19 pandemic. The ECB didn’t change its key interest rate at -0.5%.
Bank stocks were loosing around 20% of their value, as investors are worried that they are overly exposed to the fallout of the Covid-19 crisis: airliners, travel agencies, oil companies, trading companies, manufacturers, and the wider economy will all directly suffer from the quarantine and risk mitigation measures that governments and other organizations take. If they default, it hits the buffers of banks. Further, it is highly likely that certain countries, like Italy, France and Germany, will enter into recession during this year, which will have carry on effects to marketing budgets and consumer spending power. If more companies start to default, this will be the major test for the stability of the financial system since the default of Lehman Brothers. Unless central authorities come quickly with Whatever It Takes stimulus packages…
The moment that central banks and governments have found a concerted answer to the crisis, markets will recover quickly, and it will prove to be a great buying opportunity for stocks and other equity. We will need big bazookas again for the first time since the financial and euro crisis. There is no time for governments: they need to show effectiveness regarding Covid-19 containment, and restoring economic confidence at the same time.
The two industries that directly benefit from the Covid-19 outbreak are the medical and ecommerce sectors. Sick people need treatment and when shops are closed like in Italy or Wuhan, non-food items can only be bought online and the only entertainment people get is digital. Of course also working from home gets a boost, but all infrastructure needed for that is in most Western countries already in place, so not leading to significant new investments.
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