Stock markets in Toronto and New York plunged when they opened Monday morning.
Fears about the economic impact of COVID-19 have gripped investors for weeks now, as they digest the financial toll of the virus on top of the human one.
Stock markets in Asia and Europe were also down sharply Monday despite the U.S. Federal Reserve’s weekend cut to its interest rate in an attempt to keep the economy running.
The decline in North America was almost instantaneous, with the TSX composite index losing 1,569 points and the Dow Jones dropping 2,250.
Both plunges triggered automatic “circuit breakers” designed to shut down trading during times of heavy selling. The halts mean both stock exchanges are shut down for at least 15 minutes for a breather in the hopes that investors will calm down.
At the instruction of IIROC, TSX, TSXV and TSX Alpha have been halted due to the triggering of a level 1 market-wide circuit breaker. Markets are now in Pre-Open state and are set to resume trading at 09:46:00.
When the halts were lifted, the selling continued. Nearing midday, the TSX was down by 1,100 points and the Dow was off by 1,800.
The reason for the panic selling is the novel coronavirus, as investors wake up to the serious economic consequences that the virus will have.
Investors worried about domino effect of business closures
Businesses have been closing their doors in an attempt to fight the spread of the virus.
“Consumer spending will go down as people stay home because of the coronavirus,” said Odysseas Papadimitriou, the CEO of financial literacy website WalletHub. “That will hit a number of industries particularly hard, such as the service industry, travel providers, live entertainment venues, movie theatres and more.”
Investors are worried about the domino effect that all those related economic shutdowns will have on corporate profits, and by extension their stock prices.
“If a restaurant owner can no longer pay rent, the property owner might not be able to pay its loan, and the bank that made the loan might end up suffering as well,” Papadimitriou said.
The U.S. central bank said its interest rate would stay low until the economy shows it can survive a near-shutdown of activity in the United States. The Fed’s decision was designed to calm markets, but one observer says it may have had the opposite effect.
“It seems to have sparked more questions than answers for investors, particularly what has spooked the Fed so much that they couldn’t wait until their regularly scheduled policy decision on Wednesday for this announcement?” said Colin Cieszynski, chief market strategist at SIA Wealth Management in Toronto.
“In my opinion, the biggest problem for investor confidence is not knowing how bad things could get and how long disruptions could last.”
The Bank of Canada on Friday also cut its key interest rate target by half a percentage point, to 0.75 per cent, as part of a co-ordinated plan by the federal government to help the economy. Canada’s central bank is widely expected to cut again, especially after the Fed did so.
“After the Fed’s action last night, the bank is almost certainly going to cut rates again this week,” said CIBC’s foreign exchange strategist Bipan Rai. “There’s no reason for the bank to have a benchmark rate that is higher than the Fed’s ahead of an upcoming recession and with oil prices this low.”
Economists have warned that Canada is headed for a recession this year due to the impact of COVID-19 and a crash in oil prices. Canada’s main stock index posted its biggest one-day drop on record last week. It followed that up with a small rebound the next day.
Large swings up and down have been the norm of late, as investors react to the uncertainty that this worldwide pandemic presents for the economy.