The Corona Virus Panics the Exchange – What to Do Now

Erich Kästner is a famous writer, everyone knows his cheerful books like “Das doppelte Lottchen” or “Emil und die Detective”. But the author also had a dark side, which comes to light in poems like “The Ballad of the Imitation Drive” in 1931 – children hang up with playmate Fritz there, as they saw in the newspaper when executing criminals. “If someone is not afraid, he has no imagination,” said Kästner once.

The worst things start innocently, according to his message. Unfortunately, this also applies to the stock exchanges these days. There is trading with fear that struggles greedily for the favor of money every trading day. And for many years, confidence had the upper hand. Since the financial crisis in 2009, prices have had almost one direction: upwards.

But the happy times seem to be over, the flying classroom is in a nosedive. The S&P 500, Nikkei and Dax literally together. Companies around the world lost a total of $ 4 trillion in stock market value. With the money lost in the past week alone, all 30 DAX companies could be bought three times.

A shadow lays over the financial markets, fear arrives. The trigger is the corona virus, a new type of virus that attacks the airways and spreads at a frantic pace. The epidemic in China becomes a pandemic, the course of which can be traced on the world stock exchanges: Japan, South Korea, Italy – and now Germany.

It is only a matter of time before infections and deaths soar in other countries and continents like America. The Sars-CoV-2 virus spreads far too effectively for this to be able to stop it. For many days and even weeks there are no symptoms to be seen in the sufferer who ignorantly transfers the virus to others.


But as dangerous as it may be, the disease in itself may not trigger a stock market crash. Above all, fear and precautionary measures paralyze the economy: employees stay at home, trains don’t run, trade fairs are canceled.

There is a fundamental question for investors: are we witnessing a correction that will bring new momentum to new heights? Or are we currently experiencing a crash, the start of a bear market? For some observers, this may not be so unlikely: “A downward spiral is impending,” says Robert Shiller, Nobel Laureate in Economics, in an interview with the Handelsblatt.

However the courses go, panic is not a good guide. However, it is not naivety either. For example, US President Donald Trump recommended the entry into stocks via Twitter, his economic advisor Larry Kudlow agreed that investors should “seriously take advantage of the slump to get started”. The advice from the White House is understandable in an election year, but only recommendable to a limited extent. Further slumps could follow, valuations are still high.

Investors should react prudently and appropriately to their circumstances. Under no circumstances should investors cancel their share savings plans or liquidate their securities accounts. The world will not go under, the slump should be used to get started – but carefully. The right behavior for every investor depends heavily on the goals and the positioning of the portfolio. And from the personality (see the instructions for different investor types).

There is a real opportunity for long-term oriented investors who have cash at their disposal. According to Anik Sen, global equity chief at New York’s Pine Bridge investment firm, the price dip is “incredibly healthy” after the high gains in the past. “Anything going up in a straight line is very susceptible to exogenous shock.”

There is an emergency

Stocks have long been overvalued. The economy has been weakening since 2018, and more and more companies are warning of lower earnings. Still, stock prices rose to record highs. Even in 2020, when the corona virus from China infected more and more people and ever larger parts of global trade.

How could that be? There is an emergency in the world. The interest on bonds is low, some savers even have to pay penalty interest if they have their money on the high edge. The investment pressure was high, drove more and more investors into stocks and justified ever higher prices.

The result was an unreal stock exchange world in which the prices only climbed upwards. The German Dax lagged behind the major stock exchanges for a long time, but was finally infected by the global share euphoria and still reached an all-time high on February 19 with 13,789 points.

Then the swing came. America’s technology giant Apple announced record numbers in January, which gave investors a new high. But a few days ago, the iPhone manufacturer cashed in its sales forecast again.

CEO Tim Cook and his chief financial officer Luca Maestri no longer presented any new forecast. The cause is the corona virus and the resulting “unforeseeable consequences of possible delivery bottlenecks” for Apple for components of his iPhone.

Unpredictable consequences? Investors hate nothing more than uncertainty. At the same time, images from northern Italy flickered on television screens last weekend, where the authorities quarantined some regions in the face of the Corona outbreak. Austria stopped train traffic with Italy. Wherever the investor looked: negative headlines. No wonder that the epidemic has also hit the stock exchanges since Monday. The courses collapsed worldwide.

Anything going up in a straight line is very susceptible to exogenous shock. Anik Sen (Pine Bridge equity chief)

The decline cannot be justified with emotions. The epidemic has tangible economic consequences. In the “Baseline Scenario”, economists at Oxford Economics already assumed that the seasonally adjusted global economy would shrink in the first quarter of 2020 – for the first time since the onset of the financial crisis.

Overall, the institute expects the global economy to grow by 2.3 percent in 2020. That would also be the weakest value since 2009.

However, it is already clear that the “baseline scenario” will not occur. It gets worse. Because according to the scenario, the virus could have spread massively, but should have been limited to China. A global pandemic has started to spread to Europe, which according to virologists could end in April or May at the earliest.

According to Oxford Economics, this would plunge the euro zone and the United States into recession in the first half of 2020, but according to the economic research institute, this would be followed by a rapid economic recovery in the second half of the year.


How Corona has the courses under control worldwide

Frankfurt Last week, the high of the stock markets was slowed down, on Monday the prices at the most important trading places collapsed. The reason: the rapid spread of the corona virus in Europe, which was recently rampant, especially in Italy. In addition, there was bad economic data from Friday in the USA: There, the purchasing manager index fell to 49.4 points – the lowest value since 2013.

Both combined led to massive uncertainty among investors who fled stocks and wanted to invest their money as safely as possible.

At the beginning of the week, the German stock index (Dax) temporarily fell below the 13,000 point mark by more than four percent. Among others, Lufthansa, Autoaktien and Adidas, but also Deutsche Bank and Infineon were severely affected. In Milan, the courses even dropped by around six percent. In New York, the Dow Jones stock index lost nearly three percent at the start of trading. The oil price fell, while gold rose significantly – to the highest dollar price since 2013.

Across Europe, stocks of luxury companies such as LVMH, Kering (Gucci), Hermès, Richemont and Burberry were under above-average pressure. China is an important sales market for these companies. When it comes to the question of how Corona will affect further economic development, the focus is on the supply chains.

Many companies, for example in the automotive industry, but also manufacturers of smartphones and sports shoes, are dependent on deliveries from China. In the People’s Republic itself, there are growing concerns that individual companies will run out of money if their production stops for too long.

Developments in countries such as Italy, Japan, South Korea and Iran are also worrying. According to a study by the Swiss bank UBS: “While the situation in China seems to be improving, the next two weeks will depend on whether the authorities in Europe and other regions can quickly contain the disease.”

Yields are dwindling

The yield on the ten-year federal bond moved in the direction of minus 0.5 percent – it was last lower last October. The yield on the corresponding paper from the US government slipped below 1.4 percent – that was the last time it was in 2016. This means that there is again a so-called inverse interest structure, in which the long-term percentages are below the short-term, which is often an indication of an emerging recession is being interpreted.

The yield on 30-year US government bonds also fell. It moved in the direction of 1.8 percent, which was lower than ever. According to an analysis by DZ Bank, some buyers are likely to have a study by the US Federal Reserve (Fed) in mind that the next recession could see short-term yields in the US drop below zero and ten-year rates close to zero. This shows that, similar to what is already happening in Europe today, interest-bearing paper is increasingly developing into speculative investments in America.

On the other hand, it was striking that stocks in Asia slipped less than European stocks. The Japanese Nikkei and the Chinese CS 300 each lost around 0.4 percent on Monday, the Hang Seng in Hong Kong fell almost 1.8 percent, but the Korean Kospi was also far in the red with 3.9 percent.

What happens next in the markets will depend on the development of the epidemic and monetary policy. The weakness of the US economy gave reason to hope on Friday that the Fed would cut interest rates further before the presidential election in the fall. In the past year, it had reduced the key interest rate to between 1.5 and 1.75 percent in three steps.

Until recently, it seemed that she was satisfied with this level. Scott Anderson, chief economist at the Bank of the West in San Francisco, commented on the weak purchasing managers’ index: “If this shockingly weak value is confirmed by other economic indicators in the coming weeks, it will probably be enough to get the Fed back into play and move to an additional rate cut before the election. “

His assessment is in line with the market reactions. KBW says: “Market participants expect the world’s central banks, including the Fed, to save the situation if the corona virus seriously affects the supply chains and thus weakens economic growth.” As a result, the KBW experts attribute “that the shares every time rise as soon as a stimulus to monetary policy is in sight – even though the virus almost paralyzes the second largest and fastest growing economy in the world ”.

However, the European Central Bank (ECB) cannot do too much. With its interest rate, it is already minus 0.5 percent. Recently, the new ECB President Christine Lagarde made it clear that, from her perspective, monetary policy has gradually exhausted its funds – a clear warning to governments to react fiscal policy.

The Italian central bank chief Ignazio Visco expressed himself similarly in a radio interview. Italy has little financial leeway because of its high level of debt – unlike Germany.

Apple as a deterrent example

Commerzbank points out that in China Corona has now lowered the highest alert level to a lower level in six provinces. Among them is Guandong, this province alone accounts for around ten percent of the gross domestic product.

While medium-sized and small companies only started up again 30 percent, more than 70 percent of large corporations on the coast had resumed production. UBS estimates that China’s exports are currently around 70 percent of the normal level, and domestic consumption there is a 30 percent decrease if one excludes weak car purchases. The bank expects the Chinese central bank to further support the economy.

Goldman Sachs took a closer look at the supply chains. The analysts at the US investment bank point to 2011, when an earthquake in Japan had a major impact on production in the US auto factories. “This suggests that an interruption in the supply chains from China would have a major impact on developments in the United States,” says a new study. Imports from China to the United States correspond to approximately 1.7 percent of the United States’ gross domestic product.

Despite this, analysts remain relatively optimistic, although they expect the number of new infections to decrease significantly towards the end of the quarter. If the imports are only temporarily interrupted, they have a limited effect at best. In addition, according to a survey by Goldman, companies in most industries have enough stocks to be able to produce relatively undisturbed at least until the second quarter.

If the interruption lasts longer, however, there could be a “non-linear effect”, which means: Then the problems are suddenly very noticeable.

DZ Bank is also concerned with the effects of the disease on the supply chains. The damage is said to be “already now”. According to the DZ experts, China and Southeast Asian countries will suffer significant losses this year even if “the wave of illnesses, in the most favorable and still the most probable case, subsides by the end of March and cyclical catch-up effects”.

Should there be a severe pandemic, the global economy will “collapse as sharply as it has since the 2008/2009 financial crisis”. Global growth will drop below one percent. “Export-dependent economies that are closely linked to the supply chain would suffer the greatest economic losses,” it is said, with the Netherlands and Germany as examples in Europe. The US markets, on the other hand, would hold up better.

Overall, according to the DZ experts, the capital markets underestimate the consequences of the disease. As an example, they point out Apple: “While the demand in China has collapsed due to the quarantine measures, the solid demand cannot be served outside of China due to the production bottlenecks.” The powerful US company therefore has two effects coming from China.

More: The party mood on the stock exchanges is over – investors should watch the sell-off.


Von der Leyen’s tolerance facilitates the authoritarian drift of Orbán and Kaczynski | International

Commission President Ursula von der Leyen meets this Sunday with Austrian Chancellor Sebastian Kurz. On video, statements by the President on the enlargement of the EU. PHOTO: AFP | VIDEO: Reuters

Judges and lawyers from all over Europe supported a demonstration in Warsaw by their Polish colleagues in defense of judicial independence that they consider threatened by the government. The “march of a thousand robes”, as the demonstration has been described, protests against the latest judicial reforms. And it redoubles the pressure so that the European Commission does not lower its guard. Non-governmental organizations and judicial associations fear that the Commission, chaired since December 1 by Ursula von der Leyen, will be more sympathetic to Warsaw than the previous Executive, chaired by Jean-Claude Juncker. And Von der Leyen’s first gestures of rapprochement with both Poland and Hungary have set off alarms.

Build bridges east to prevent the Brussels clash with Poland and Hungary from cracking the European Union. That has been the strategy of the President of Von der Leyen since the European Parliament approved her appointment on July 16. The German conservative has maintained benevolence with the Poland of Jarosław Kaczynski and Viktor Orbán’s Hungary after taking office on December 1. But six months of courting governments with authoritarian tendencies have so far yielded no results.

“The situation is very serious and that is why we are here,” José Igreja Matos, president of the European Association of Judges, told Reuters during the march in Warsaw. Authoritarian skids in Warsaw and Budapest, far from slowing down, have accelerated during the second half of the year.

And the apparent passivity and even tolerance of von der Leyen worries the political and social forces that are struggling in these two countries and in other members of the EU to maintain a system based on the rule of law, judicial independence and freedom of the press. The repeated and overwhelming electoral victories of Orbán’s Fidesz and Kaczynski’s PiS (Law and Justice) further complicate possible intervention by Brussels.

Poland’s latest moves to distance itself from EU jurisprudence and push away magistrates who dare to disagree with the government line have sounded alarm bells again, to the point that some analysts point to Kaczynski’s country moving toward a de facto departure from the community club.

In mid-December, dozens of Polish academics and representatives of non-governmental organizations pleaded in writing with the Von der Leyen Commission to ask the EU Court for the precautionary suspension of new judicial reforms, as it did in 2018, with resounding success, the Commission headed by Jean-Claude Juncker when Warsaw approved early retirement. But, for now, the response of the current Commission has been a letter from Vice President Vera Jourova (who has replaced Frans Timmermans in monitoring the rule of law) demanding last Thursday the Polish Parliament to stop the reform process. Less than 24 hours later, the reform was approved.

“The von der Leyen Commission appears to be more timid than the Juncker Commission in defending the rule of law in Hungary and Poland,” concludes Alberto Alemanno, professor at the Jean Monnet Chair in European Law at the École des Hautes Études Commerciales de Paris. “And it is difficult to forget that the bizarre and tight confirmation of Von der Leyen in the European Parliament [por solo nueve votos de margen] It was achieved thanks to the support of PIS and Fidesz, the two ruling parties in Poland and Hungary. Is it just a coincidence? “Asks the analyst.

Von der Leyen, in effect, was imposed as president of the Commission thanks to the frontal rejection of Warsaw and Budapest to the socialist candidate, Frans Timmermans, vice-president of the Commission and considered by both capitals as the whip of article 7 (which punishes countries that violate the fundamental values ​​of the EU). The Orbán and Kaczynski MEPs were also key for the German to barely pass the investiture vote.

As soon as she was elected in July, Von der Leyen began her procession to uncomfortable governments. Warsaw was the third capital of the EU to visit as President-elect, behind only Berlin and Paris. And although the meeting with the Polish authorities was difficult, the German conservative chose to highlight the meeting points and tried to cajole that region of Europe with the large investments that the community budget can provide. A promise that was doubled months later with possible financing linked to the Green Pact to decarbonize the European economy.

The President also assigned powerful portfolios to the four commissioners from the so-called Visegrad group: Agriculture, to Poland; Enlargement, to Hungary; the Vice Presidency for Fundamental Values ​​and Transparency, to the Czech Republic; and the Vice Presidency for Institutional Relations, to Slovakia.

The political family of Von der Leyen, the European People’s Party, has also maintained bridges with Viktor Orbán’s Hungarian government, despite the increasingly unsustainable coexistence. The PPE suspended the membership of Fidesz, Orbán’s party, before the European elections. But he avoided the expulsion to give the umpteenth opportunity to recover ties with Budapest. Neither the Commission’s appeasement strategy nor the PPE’s have produced any results so far.

“Democracy is dying in Poland and Hungary,” warned liberal MEP Sophie in ‘t Veld during a session of the European Parliament’s Committee on Freedoms on Monday. “And the disease is spreading,” he added, in the same week that Parliament has pushed for Malta’s Prime Minister, Joseph Muscat, to resign immediately due to the possible involvement of his environment in the case of the murder of journalist Daphne. Caruana Galizia.

Structural funds

The president of that Commission and rapporteur for the application of article 7 to Poland, the socialist Juan Fernando López Aguilar, pointed out in the same session the string of potential infractions and “political interference in the Constitutional Court” that progressively undermine the rule of law in the fifth largest country in the EU.

The new European Commissioner for Justice, the Belgian liberal Didier Reynders, assures that he will keep the files open against Poland and Hungary based on Article 7. But he advocates “equipping himself with new instruments”, as a general surveillance mechanism, over all States members, regarding respect for fundamental values. And for introducing the possibility of suspending the structural funds to countries that violate these values ​​(Poland and Hungary have allocated 86,000 million and 25,000 million, respectively, in the current budgetary framework).

But community sources point to the risk that the general surveillance framework will eventually dilute the pressure on capitals with greater authoritarian tendencies. And diplomatic sources acknowledge that the suspension of the funds would require majorities in the Council that would never be reached, as has already happened in the application of article 7.

“Time passes and what has been established in Europe is a pattern of how to carry out an authoritarian restructuring in a liberal democracy,” said MEP Terry Reintke, from the group of the Greens, during the aforementioned debate in the Parliamentary Commission. “And it is always the same process. First they go for the media, then they invoke an external threat, usually from people with another religion, and then they talk all the time and finally they turn into internal threat to the disagreeing social groups of their vision (…) And it works for them, “added Reintke.

“Orbán’s propaganda is stronger than Putin’s”

Hungarian Prime Minister Viktor Orbán will face in the coming weeks the threat that his party, Fidesz, will be expelled from the European People’s Party. Three prominent figures of the popular – Herman Van Rompuy, Hans-Gert Pöttering and Wolfgang Schüssel – are preparing the report that will allow PPE President Donald Tusk to recommend or not the expulsion in February 2020. “It will be a very delicate moment “, recognizes a source close to the file. “If he is expelled, Orbán will try to make him profitable electorally with a campaign of victimhood.” Budapest’s growing control over the media can help fuel that campaign. “Freedom of expression is disappearing in Hungary,” warned Ramona Strugariau, a liberal MEP for the Renew group last week. Strugariau has just attended a media congress in Budapest. And he assures that “the name of Orbán produced chills among the attendees”. The MEP assured the European Parliament’s Committee on Freedoms that disinformation campaigns blamed on Putin’s Kremlin do not reach Hungary because “Orbán’s propaganda is even stronger than that of Russia.”