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When Corona hits the stock exchange
What does the oil price have to do with the corona virus? The historic crash on Wall Street could be a short-term panic. Or become a system crisis.
Even old people on Wall Street had never seen a Monday morning like this . As soon as the opening bell rang, the courses crashed . The crash was so hard that the New York Stock Exchange pulled the emergency brake and completely suspended all stocks listed there for 15 minutes. For the financial markets, where securities now change hands in a fraction of a second, this is an eternity.
But even after the forced break, the situation hardly calmed down. The Dow Jones, the heavyweight index of the US economy, ended up losing over 2,000 points - a historic loss in terms of points. The S&P 500 fell over seven percent - it was the biggest daily loss since 2008. Commodities, currencies - everything went down. Some investors deal with gallows humor: "According to the latest status of my retirement plan, I work until I am 95", wrote user Nunes Cat on the picture of a skeleton.
Concern over a repeat of 2008, the panic after the fall of Lehman Brothers , further increased fear among investors and traders. It was the dreaded " Run to the Exit " - where no investor wants to be left behind and sell his papers and assets in the hope of getting out at a better price. And so investors fled riskier securities and looked for safer investments for their money. In turbulent phases, these are primarily US government bonds.
The rush on American debt securities - called Treasuries - pushed up prices and at the same time depressed returns. The ten-year government bonds temporarily stood at 0.5 percent. So deep were the yields on Treasuries has never in the history of Wall Street . After deducting the inflation rate, the United States is now experiencing negative interest rates - with all the side effects it brings and to an unprecedented extent.
Negative interest rates - already routine in Europe - punish those who save. This affects not only savings account holders, but also pension funds and insurers, who have to increase their capital in the long term in order to be able to meet their payment obligations. But that's only part of the problem. The entire financial system is based on positive interest rates. Not only because banks are becoming more reluctant, rather than increasing lending. Which in turn could accelerate a recession. The minus interest also disrupts crucial processes. For example, banks routinely borrow securities to process transactions between investors. These businesses are something like the gears of credit. If banks had to pay for the loaned paper in the future, there would be no incentive to participate.
The panic was triggered by a reverse oil shock. Negotiations between Russia and Opec had finally failed over the weekend. Actually, the oil producers had wanted to agree to cut production. This was intended to stop the fall in prices after China's oil demand collapsed due to the corona virus. The Chinese were recently the largest importers of oil. But not only did President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman disagree, the former partners broke up in the dispute.
But at the weekend, Saudi Arabia then announced that it would even increase production despite the weakening demand, in other words: to start a price war. This temporarily caused the oil price to drop by more than a third on Monday. Brent, the benchmark for global oil prices, was 31 per barrel - the barrel was trading at $ 50 last Thursday.
At another point in time, the price war between the two oil powers would have spurred the stock market. A low oil price promises lower energy costs, cheap fuel and heating oil, and thus more money in the pockets of consumers. That's exactly what President Trump tweeted: "Good for consumers, gasoline prices are falling," he wrote. And explained: "Nothing is closed, life & the economy continue."
Normally, the president would be right: more consumption - especially in the USA - drives economic growth, which in turn usually anticipates the stock market with rising prices. Usually. But nothing is normal anymore in times of the corona virus . The oil price war has intensified fears of a recession that have plagued investors since it became clear that the virus is spreading to more and more countries. It may have played a role that the epidemic no longer spares the world's financial capital. At the weekend, the governor of the State of New York declared the state of emergency in view of the rapidly increasing number of infected and sick people.
In addition, a drop in the oil price has now had a negative impact on the US economy. The United States is again the world's largest oil producer after decades. A low oil price will hit the domestic industry hard. Exxon and Chevron papers lost more than 14 percent in the first few minutes of trading. Not only the mining companies themselves suffer, but also the suppliers of pipeline pipes and tanks - right down to the steelworks. And there is another connection to Wall Street. The US oil producers are for the most part smaller, independent companies - and mostly heavily indebted. This fuels the fear of loan defaults on the bond market and at banks.
Especially since the banks are already suffering from the fact that Wall Street expects the central bank to cut interest rates further. The Fed had already cut key interest rates by 0.5 percentage points last week. Market participants are now speculating that the US Federal Reserve will return to the zero interest rate policy. That means less income for the banks. The courses fell accordingly. JP Morgan alone, the largest US bank with total assets of 2.6 trillion, temporarily lost more than 12 percent.
It cannot be ruled out that we will see a course recovery in the next few days. The New York Stock Exchange recorded the two best trading days in its history last week. But the rashes are getting more violent and every time there is a risk that the turnaround will not happen - or worse, that the short-term panic will turn into a systemic crisis.
