The inconsistency symbolizes mood on the US financial markets: investors want nothing more than clear messages from the White House. They finally want to be able to estimate how drastic the government’s measures against the corona crisis will be and what aid the US economy can count on.
Every communicative confusion is seen by investors as evidence that worse is yet to come. This applies in particular to the question of whether the immediate environment of the President has really been tested for Corona. And largely for the possibility that the US is facing a recession, as Trump virtually admitted on Monday: “Although I prefer to see it as an upswing that will start as soon as we have defeated the virus”.
The way to work alone made the corona crisis omnipresent for traders on Monday. At the entrance of the New York Stock Exchange It was swarming with medical staff in white coats and a face mask, which at the security check also measured the temperature of the dealers with fever pistols.
The leading Dow Jones index closed almost 13 percent in the red. In percentage terms, this is the biggest daily loss since 1987 and, according to index points, the biggest loss ever. Trump’s appearance accelerated the course of the Kurstal shortly before the close of trading.
To a certain extent, the slump in prices is normal. After all, it is already clear that the majority of American and global companies will have to drastically lower their sales and profit forecasts for the current year. But in the United States, politics is currently acting as a fire accelerator. In addition to the unclear and uncoordinated political crisis communication, there are three other factors that have intensified yesterday’s crash on the US stock exchanges:
- The unexpected cut in the key interest rate by the US Federal Reserve (Fed) should instill new confidence in the stock markets – but was seen rather as evidence that the situation must be worse than previously thought.
- A tax-financed Corona social package is still stuck in the Senate – and already seems too small in view of the wave of layoffs that are rolling towards American workers.
- A mental game also contributes to the end-time mood on Wall Street: that the US stock exchanges could be closed for several days so that politics gains time for a decisive economic response to the crisis.
1. Politicians are not responding quickly enough
For his corona crisis management, Trump gave himself the top grade of ten on a scale of one to ten on Monday. At the same time, he admitted for the first time: “The virus is not under control”. His crisis management team issued behavioral recommendations to US citizens: They should not visit any bars or restaurants for the next 15 days, avoid meeting more than ten people and avoid unnecessary trips. After this test period you want to see further.
If the voluntary rules do not work, Trump also considers a mandatory nationwide curfew possible. He expects that the behavioral restrictions “will extend into July or August”. Individual states or cities in the USA are already much more radical and have ordered the forced closure of restaurants, gyms and schools.
What is missing are just as radical steps to alleviate the economic consequences for companies and above all for the citizens. Only the American airlines promised “100 percent support” on Monday – their shares then rose significantly against the overall market.
A legislative package that is supposed to alleviate the worst economic consequences of the corona crisis is still stuck in deliberations in the Senate. Some Republican senators are getting in the way, negotiations are ongoing. The package primarily contains financial aid for employees who are unable to go to work due to the corona crisis. It is already clear that this law will in no way suffice.
The work on another aid package for families and companies in need started in the Senate on Monday. But both laws come too late to send the desired signal to the financial markets: that the Federal Reserve, government and parliament in the US work hand in hand to avoid a complete crash of the US economy.
2. Will the Fed buy short-term corporate bonds soon?
The US Federal Reserve has been taking extraordinary measures for weeks to ensure the stability of the financial markets. On Sunday, it unexpectedly cut its key rate by a full percentage point to the zero to 0.25 percent range and announced a number of other moves, including $ 700 billion in bond purchases.
The effect fizzled out. The New York stock markets had to be suspended again shortly after the start because of the automatic volatility breakers: trading has been suspended for 15 minutes for the third time in the past six trading days because the broad share index S&P 500 has dropped by more than seven Percent had fallen.
On Monday noon, the Fed had to grant loans on the money market again to avoid bottlenecks. For example, there have been liquidity shortages in the market for so-called commercial paper, short-term corporate bonds. They use companies to quickly get liquidity. They issue bonds with a short term and thus fill their cash reserves. But with the intensification of the corona crisis, banks are increasingly failing to buy these commercial papers.
“The market for commercial paper is practically frozen,” warn analysts at Bank of America. “Everyone wants to secure cash and banks are having trouble coping with this one-sided demand.” For days, speculation has begun as to whether the Fed could step in as a buyer of the short-term bonds.
Industry insiders believe that the Fed could intervene on Tuesday or Wednesday, just as it did in the financial crisis. If this does not happen, companies with cash requirements would have to rely even more on bank loans. And this at a time when banks are no longer so risk-taking and many corporations have already exhausted their credit lines to prepare for the consequences of the virus.
3. Rumors of stock exchange closure
Since the weekend, there has also been discussion of the possibility of closing the US stock exchanges for a certain time, similar to the terrorist attacks of September 11. At that time, the stock markets closed on the day of the attacks (Tuesday) and reopened the following Monday. The debate was sparked by Peter Atwater, a professor at the Wiliam & Mary University in Delaware, who conducts research on the topic of confidence in the financial markets.
“After what we’ve seen in China, Italy, and Spain, some kind of national shutdown seems inevitable,” wrote Atwater in a post he posted on the LinkedIn social network. “It is very difficult to maintain panic for a long time,” Atwater told the Handelsblatt. “People are exhausted. There is almost a desire for a kind of surrender to end this extreme situation. ”If the real economy actually comes to a standstill, not much would be lost if the financial markets also close, he argues.
The US stock exchange operators and the SEC regulators do not want to know about this. Stacey Cunningham, the head of the New York Stock Exchange, addressed via Monday Twitter to the investors. “It is important that the markets stay open and do what they do,” said Cunningham. She was aware of the concerns about the sharp drop in prices, but “the market reflects the uncertainties that everyone is experiencing in these difficult days.”
The chief financial officer SEC Clay Jayton said similarly on Monday. Terry Duffy, head of the CME options and futures exchange in Chicago, brought a compromise solution into play on the CNBC, a US exchange, according to which the markets would close for the rest of the day if they collapse more than 13 percent as a “measure against high price fluctuations “.
Deutsche Börse is not considering closing the markets
In Germany, closing the markets is not an issue like that German Stock Exchange stressed. The Stock Exchange Act lists a number of reasons why trading on the stock exchanges or in individual securities may be suspended. Currently, however, “none of these conditions exist,” the company said.
Germany’s largest exchange operator does not believe in this. “It would be a fallacy to believe that markets will calm down when trading is suspended,” the company said. “The opposite would be the case. There could be a sell-out before the markets close, and a potentiated reaction of the market participants after reopening. ”
According to Atwater, however, this extraordinary measure could at best even stop the downward spiral. A possible scenario for the professor, who also heads the financial insights analysis company, could look like this: After a particularly difficult day on the stock exchange, the largest volatility interrupter is already starting to appear. It ends trading for the rest of the day when prices drop more than 20 percent.
“After that, the government could decide to close the markets for a few days and use the time to implement comprehensive fiscal measures,” he said. If the markets reopen afterwards, the chances of stabilization would be good.
Such a trade stop is still just a mind game. However, the mere fact that it is discussed causes additional uncertainty on the stock exchanges.
In order for Atwater’s plan to work, US politics would have to come up with a convincing rescue and economic stimulus package within a few days of the closing of the stock exchange. The man whose political management skills you would have to rely on is Donald Trump. And he commented on Monday’s turbulence in the financial markets with a single sentence: “The markets take care of themselves.”
More: Read here why the central banks cannot now help the stock exchanges.