For the global financial system, it has been a month of unprecedented pandemonium as the coronavirus pandemic breaks all records, bringing western capitalism to its knees as the disease spreads.
Major landmarks in global markets that typically take years to reach have fallen like dominos in a matter of hours and days. More than eight years of gains on the FTSE 100 have been wiped out in barely a month, with the index plummeting to its lowest level since 2011.
Global stocks have had the best and worst sessions in a decade on consecutive days, pinging around amid widespread investor panic. The pound has slid to a 35-year low and fortunes have been lost, rewriting the financial landscape.
Against a backdrop of urgent attempts by governments and central banks to limit the damage as nations stamp down on economic activity to stop the virus spreading, investor panic sent Wall Street into its fastest bear-market plunge in history. The Dow Jones industrial average of 30 leading US company shares fell by more than 20% from its previous peak – the definition of a bear market – in little more than 20 days, outstripping the speed of the slide during the 1929 Wall Street crash.
Ending the longest bull market in US stocks in history, Wall Street has had two of the five worst days ever – only days apart from the fourth-best day on record. On the worst day of all, 16 March, the Dow crashed by almost 3,000 points, wiping 12.9% off the index.
The extent of the frenetic trading has meant that circuit breakers – which temporarily halt the market to prevent stocks falling through the floor – have been triggered four times in the past month, making a total of five times since the system was launched in the late 1980s. The only other time was during the 2008 financial crisis.
The crash in the past month comes despite global central banks racing into action with emergency interest rate cuts, attempting to calm panicked markets and support jobs and growth. The US Federal Reserve has cut rates near to zero and promised to buy government bonds in unlimited amounts, while the Bank of England will pump £200bn into the economy through quantitative easing, and governments around the world will guarantee loans and pay workers’ wages, promising to do whatever it takes” to combat the economic disaster.
As the damage continues to unfold, analysts believe the deepest global recession in history has arrived, surpassing the magnitude of two world wars. Questions remain over whether the downturn will be as long-lasting as previous episodes, with hopes for a quick snap-back in activity to also make it the shortest in history.
But observers say the world will never look the same again when the storm clouds clear.
“This is a generation-defining moment,” said Mohamed El-Erian, chief economic adviser at the insurance giant Allianz. “I’ve never seen an economic stop on this scale, certainly never in big countries and all at once.”
Although China was grappling with the disease around the turn of the year, stocks took until late January to wobble. Before the lunar new year – key for shopping and tourism in the world’s second-largest economy – authorities locked down the central city of Wuhan, where the virus originated, triggering mass disruption to global supply chains as China’s equivalent of Detroit downed tools.
The Asian economic superpower may now suffer its first quarterly fall in GDP since 1976, the year Mao Zedong died.
At first investors remained complacent, betting that Covid-19 would be no worse for world growth than Sars in 2003, when that coronavirus outbreak – related to Covid-19 – was mainly limited to Asia, and China quickly recovered. Yet those who “bought the dip” after the initial tumble – now minuscule in hindsight – are left nursing massive losses.
El-Erian, a former deputy director of the International Monetary Fund, said: “We went from a period of total complacency that not only brushed aside increasing evidence of a cascading economic stop, but also over-relied on central banks’ ability to shield markets. Then, phase two was one of near panic, where markets woke up to the ugly reality.”
The world’s richest people on the Bloomberg billionaires index have lost around $1tn (£800bn) from plunging share prices in the past month. But some have made vast amounts of money. The hedge fund manager Bill Ackman claimed his firm made $2.6bn betting the coronavirus would cause a market crash, barely a week after warning that “hell is coming” for US companies.
Yet movements on financial markets have real-world consequences. Tumbling asset prices hit the pensions of millions and make it harder for firms to access finance. Surging bond yields make it costlier to fund spending plans, particularly in poorer nations, where the threat of a new debt crisis alongside the health emergency could spell disaster.
Investors worry that a negative feedback loop could form: fears of recession causing markets to tumble, leading to tougher borrowing conditions, fuelling recession as companies struggle for finance. The unprecedented central bank intervention is designed to prevent a repeat of the 2008 financial shock, and the downturn that followed.
The lack of a united response from world leaders has fuelled the global sell-off. Unlike in 2008, when a coordinated G20 response was used to fight the financial crisis, world leaders are in disarray. Donald Trump first called the virus a Democratic hoax, while promising that efforts to contain the disease can be lifted next month, even as the virus spreads.
The prospect of a global downturn has driven oil prices down dramatically this month, to 17-year lows. Global demand has slumped because of lockdowns, while the infighting between G20 nations has made matters worse as Saudi Arabia boosts production in a price war with Russia. Some US shale producers face going bust – dashing America’s hopes of energy independence, and risking a wave of corporate bond defaults this year.
Covid-19 even threatened to reignite the eurozone debt crisis. European governments have promised massive stimulus packages, and the resulting borrowing will drive deficit levels high.
Italian bond yields – the interest rate on Rome’s debt – spiked after the European Central Bank chief Christine Lagarde sparked fears that it might not step in if investors lost faith in Italy’s ability to manage its debt mountain. Cue a rapid clarification from the ECB, but some anxiety remains.
In a historic, if temporary, move, the EU has now suspended its borrowing rules, allowing member states to spend what’s needed – and worry about the bill later. Even Germany, the uber-fan of balanced budgets, has ripped up its “debt brake” and devised a historic €156bn (£140bn) emergency budget. The days of eurozone austerity may be over, at least for now, as Europe heads for a deep recession.
Although stocks recovered during the week, the mood soured on Friday, with heavy losses again in Europe and on Wall Street. City investors muttered darkly about “bear market rallies”, remembering that stocks can occasionally rally even during a lengthy sell-off.
With the VIX volatility index – known as Wall Street’s fear gauge – hitting its highest levels ever this month, further wild swings seem certain, especially as America has now overtaken China for Covid-19 infections.
Yet El-Erian has noted that, after phases of complacency and panic, a period of relief has spread as governments and central banks use unprecedented stimulus packages to cushion the blow. The next phase will test how effective the response is, as the world economy attempts to find its feet once more.
“We’ve passed through the least controllable part, but we’re not out of the woods,” he said.
