From the April 2020 issue of the Socialist Standard
Another Market Panic
At the time of writing, the world’s stock markets have been in near free-fall with many of them entering ‘bear market’ territory (defined as falling 20 percent or more from their recent high). This has been in response to the concern around Covid-19 coronavirus, as human fright turns into financial panic. It is essentially because investors are fearful that ‘lockdowns’ in countries like Italy will negatively impact on company revenues and profits. Obvious candidates like airline companies and events management agencies have been especially hard hit, though the financial contagion has spread far and wide to nearly all sectors.
There are a number of elements to this financial panic. One is that when market sell-offs occur, the actions of dominant financial players tend to exacerbate them, as they did in the financial crisis of 2008. Many operate automatic trading systems driven by algorithms which will trigger further sales of shares when certain low prices are reached. These traders also tend to deploy ‘short positions’ to protect themselves from falling markets, which involves profiting from betting that certain shares will fall — but thereby making their falls all the steeper. This has been illustrated by what US asset management firms like Fidelity have said has been happening during this panic — that asset management firms and hedge funds have been on the sell side of most trades, while private investors have disproportionately been on the other side of the trade, buying for the longer-term (in the view that there’s a sale on). The Financial Times (7 March) reported that since 1960, of the 13 most volatile stock market periods, seven of them have happened since 2007.
Investors have been especially concerned that the coronavirus scare will lead to recessions in the countries affected (and even others too). This is on the back of investor suspicion that some of the world’s major economies have most likely been on the brink of a recession anyway. A good indicator of this has been the recent inversion of the yield curve in the world’s largest economy, the US. This happens when interest rates for tying up your money for longer (e.g ten years) are lower than for short periods (e.g two years). It is the opposite to the usual situation, and indicates fear in the government bond markets as investors move from investing in riskier assets to the safe haven of long-term government bonds, pushing their prices up and their yields down. This happened in the US late last year and is usually one of the best lead indicators of a coming recession there is, also reflecting the fact investors believe future interest rates will fall (as they do doing recessions). During the current panic, the yield on 10 year US Treasuries has reached the lowest it has been in history, at the time of writing 0.7 percent, i.e less than inflation and therefore effectively paying the US government for the privilege of taking your money.
Another factor in the market panic has been the oil price. Some of those hardest hit on the stock markets have been oil majors like BP and Royal Dutch Shell as the oil price collapses, falling at one stage by a third in a single day (to around $30 a barrel for Brent crude). This has been because the major oil producer states, dominated by OPEC, have failed to agree with another major oil producer, Russia, to limit production and therefore push up prices. There is a suspicion that Russia won’t play ball as it hopes a falling oil price will drive a lot of newer US companies producing oil and gas from shale deposits out of business altogether — a tactical ploy that is exacerbating the panic.
Despite this current chaos, the crisis will of course pass and lower interest rates and lower commodity prices like oil will be among the motor forces for this. In the meantime the traders will scream and shout as they try to assess the real extent of the underlying economic crisis – seemingly unable to leap out of a rollercoaster ride that’s been scarier than usual for them, and for some good reasons.
DAP
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