The Economist 29Feb2020

TheEconomistFebruary 29th 2020 57

1

W

hen america, the hub of global capi-

tal, is this far into an economic ex-

pansion and a bull market, investors feel

two conflicting impulses. They hope that

the good times will last, so they are reluc-

tant to pull their money out. They also wor-

ry that the party may suddenly end. This is

the late-cycle mindset. It reacts to occa-

sional growth scares—about trade wars or

corporate debt or some other upset. But it

tends not to take them seriously for long.

Covid-19 is a grave threat to the market’s

poise. News from Italy of the biggest coro-

navirus outbreak outside Asia led to a 3.4%

decline in the s&p500 index of American

stocks on February 24th, the biggest one-

day fall for two years. The rout encom-

passed global stockmarkets, which were

down sharply from highs reached earlier in

February. As The Economistwent to press,

the markets remained nervy. In the face of

such uncertainty, more days like Monday

are to be expected.

Investors have, sensibly, tried to calcu-

late which assets are most exposed to the

shock. Copper, an economic bellwether,

plunged. The worst-hit stocks were of

firms that rely on far-flung supply chains,

such as carmakers; or are directly affected

by restrictions on travel, such as airlines;

or are most exposed to a China-led global

slowdown, such as oil firms. Investors

scrambled for safe assets. Gold reached a

seven-year high. The dollar rallied. The

yield on ten-year Treasury bonds fell to an

all-time low of 1.29% on February 27th.

But there is also an uneasy sense that

the virus could trigger a bigger rupture in

financial markets that have been going up

by so much for so long that pockets of dan-

gerous risk-taking are bound to exist. Two

worries are top of mind: the opaque edifice

of financial instruments that rely on low

volatility, and the swollen credit markets.

Start with the first, volatility. Equity-

market instability might feed on itself. The

vix, which measures the expected volatil-

ity implied by the price of options on the

s&p500 index, vaulted from around 15 to

above 27 in a matter of days (see chart 1).

Some investment strategies are particular-

ly sensitive to it. For example when volatil-

ity is low, they allow for a bigger weighting

of equities in portfolios. But when it rises

and stays high, some investors are forced

Covid-19 and market turmoil

Spread and stutter

Could the virus expose deeper financial fragilities that have been masked by an

epic bull run?

Fearfactors

Sources:DatastreamfromRefinitiv;ChicagoBoardOptionsExchange

1

MSCI World airlines index

Copper price

MSCI World hotels & leisure index

MSCI World Asia Pacific index

Broad trade-weighted dollar index

MSCI World water-utilities index

S&P US ten-year Treasury-bond index

Gold price

100-10-20

Jan 1st-Feb 26th 2020, % change

30

20

10

0

2019 2020

FJDNOSAJJMAMF

Cboe volatility index (VIX)

Finance & economics

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