As a seemingly endless stream of reports continues to pour in surrounding the coronavirus, many are becoming increasingly concerned over the effects this global pandemic could have on the global financial system.
In fact, the outbreak is shaping up to potentially cause one of the worst financial crashes of all time. With some even saying that the current pandemic will be just as bad as the Wall Street Crash of 1929, the Dotcom bubble of the early 2000s, and the Global Financial Crash of 2008.
As of yesterday, March 12, 2020, the VIX, otherwise known as “the fear index”, has been trading at its highest levels since the 2008 financial crisis.
In fact, virtually all financial assets were down yesterday, March 12, which has since become known as “Black Thursday”. This included major drops in commodities, equities, corporate debt, cryptocurrencies, and even gold – all of which have taken a hit.
Just as a side note, during the recent global financial crisis of 2008, gold was declining at the first signs of the crisis, but quickly gained a downward momentum as the crisis intensified.
VIX, March13, 2020. Chart by TradingView
During yesterday, the Dow Jones recorded its worst day since the Black Monday of the 1929 financial crisis. The S&P 500 recorded 9.5% losses yesterday, down 26.7% from February 19th’s all-time high.
As it stands, all major Wall Street indexes have recorded 20% drops from their record highs, which changes the market’s status from a ‘bull market’ to a ‘bear market’ for the first time since 2009.
In Italy, the country is now on high-alert as citizens fear a recession in the near future. In fact, the country has recently announced a suspension on mortgages to help counteract the effects of the economic blow and prevent a financial crisis from developing.
Currently, the tourism-based country has been one of the hardest hit by the coronavirus outbreak, and the end doesn’t seem to be anywhere near.
Unemployment is also rampant in the European nation, at only 28.9% for those under the age of 25.
Besides Italy, many other leading EU economies are starting to feel the impact of the virus. This includes Germany, France, Switzerland, and Spain.
To date, there has been a total of 140K reported cases of the coronavirus worldwide.
While roughly half of these cases have now been confirmed as cured, there have been over 5,000 deaths related to the virus. And as reports continue to emerge from new regions all around the globe, these numbers are only expected to rise.
Of course, a cure is only a matter of time. But until scientists develop one, test it, and deliver it – it’s likely to take months, possibly even a year or more. There is hope that the coming spring and summer months will kill the virus, but there’s no guarantee it won’t return.
Regarding its economic effects, the world just simply doesn’t know how to deal this magnitude of a global virus outbreak.
Unlike in 2008, where it was apparent what needed to be fixed, this new situation has health matters involved as well.
Following the recent market collapse, the United States’ Fed already issued its first life-saving measures, by cutting the interest rate by 0.5%. Yesterday, came another one: a $1.5 trillion liquidity injection to the markets.
However, even this didn’t save Wall Street from the fatal double-digit crash we’ve recently witnessed. And now, Trump is demanding even more action from the Fed.
Since the Financial Crisis of 2008, the mainstay of global financial risk has been shifted from the national banks to the asset management industry. Therefore, they don’t believe that another crisis is likely.
But, while there’s no doubt that a viral outbreak of this magnitude is going to have deep, far-reaching effects on global economic systems, many point to the underlying fragility of the system as the main culprit surrounding the recent upsets.
In fact, the main reasons for the recent volatility are low-interest rates and increased leverage on the buyer’s side of the trade.
In other words, the system is already off-kilter, and this pandemic could be the “straw that breaks the camel’s back,” overwhelming global systems and potentially causing another global financial crisis.
