The Wildest Elements of This Week's Global Meltdown in Markets
(Bloomberg) -- How do we put a remarkable week for markets into historical context?
On almost any basis, this was the most extreme sell-off in global stocks since the aftermath of the downgrade of U.S. sovereign debt in August 2011. Meanwhile, the rush into the safety of bonds was unprecedented: the 30-year bond yield has never been so low, while the 2-year yield has only ever been so far below the Federal Reserve’s benchmark overnight rate during the worst of the global financial crisis.
This plummet was driven primarily by an external, non-financial event — the news over the weekend that the coronavirus had plainly spread beyond Asia. That makes it unlike almost any other financial shock of the last decade.
But the stock market’s reaction appears more dramatic than after the two most recent comparable external shocks — the invasion of Kuwait by Iraq in 1990, and the 9/11 terrorist attacks of 2001. Stocks recovered after 9/11, and languished after the Kuwait invasion, so there is no clear precedent for what comes next:
The U.S. stock market has been brought to valuations that look extremely cheap compared with bonds. At present, the dividend yield on the S&P 500 is higher than the yield you could get from a 30-year Treasury bond. With the exception of a few of the darkest days in the financial crisis, this is unprecedented. It is certainly unheard of when the U.S. stock market is only a matter of days removed from an all-time high:
The sell-off was not restricted to equities. The Bloomberg Commodities index, covering metals and agricultural products as well as energy, has long languished in a bear market. But this week, it dropped to a fresh low for the century. Normally, this would only make sense if traders were braced for an imminent recession:
In another sign of deeply bearish attitudes toward global growth, currencies in developing economies have also now hit a new low. JPMorgan’s index of emerging-market foreign exchange is at its lowest against the dollar since inception in 2010. While this might help emerging countries’ competitiveness, it will increase concerns about their ability to repay dollar-denominated debt:
But one remarkable factor in the market’s behavior this week is that China, where the coronavirus emerged and has claimed by far the most victims, appears to have ceased to be a concern. Over the last five days, Chinese stocks have outperformed developed-world equities by almost 8 percentage points — the most it has managed in any week since the yuan devaluation crisis in the summer of 2015:
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