US Stock Markets Tank 30% – Will the Meltdown Continue

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US Stock Markets Tank 30% – Will the Meltdown Continue?

The risk of a sudden stop in global economic activity, due to the coronavirus outbreak and the recent oil shock, had prompted massive selling in the US stock markets, with all three major indices tanking by approximately 30% until March 12 th . Right now, the market is dominated by fear and without an end in sight, the worst-case scenario continues to be priced in.

What could turn the tide?

So far, the US Federal Reserve had cut its benchmark interest rate by 50 basis points and just had announced three rounds of 3-months repo operations that will inject 1.5 trillion dollars in liquidity. That confirms all major banks are facing serious challenges and with assistance from the Fed, could things turn the other way around?

Although the massive drop is easily understandable due to deteriorating economic prospects, it does not mean markets will go to zero. From a technical point of view, the likelihood of a sharp rebound is very high, given the current extreme oversold conditions. In the longer-run, we might witness continues pressure on risk assets (stocks), but the short-run favors a technical rebound, or “dead cat bounce” as analysts like to call it.

It is true that gold and bonds had outperformed, confirming the strong demand for safe assets, but same as 2008, when the global financial crisis started, the massive drop in yields had been followed by a strong rebound. CFD traders must understand that market participants are not always in sync with what happens in the economy at any given time. Institutional investors are allocating capital based on their expectations for the future.

A recession or depression ahead?

Stock markets had always acted as an early signal for what lies ahead from an economic standpoint. The 30% drop and the VIX (Chicago volatility index) standing at 70, we will surely have a recession in 2020 or 2021. The issue, though, had to do with the huge amount of debt outstanding at a global scale.

The world hadn’t seen such a high level of indebtedness since WWII and the same as it happened then, a period when the debt had to be reduced had occurred. Depending on how things will progress in the near term, the same thing could happen during the next 2-3 years. We could be at the end of a long-term debt-cycle, as Ray Dalio, a famous US investor, in claiming, and the economic implications will be severe if that turns out to be true.

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Shawn Langlois

‘The Democratic field is poor, but Trump is dead’

Dr. Nouriel Roubini of New York University Stern School of Business,

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“ ‘I expect global equities to tank by 30% to 40% this year. My advice is: Put your money into cash and safe government bonds.’ ”

That’s economist Nouriel Roubini sharing his gloomy outlook on the market in an interview with Germany’s Der Spiegel last week.

“You have to hedge your money against a crash,” Roubini continued, adding that his motto is “Better safe than sorry!”

His latest bearish take — which lives up to his “Dr. Doom” nickname — comes amid a market that saw a February peak-to-trough drop in the S&P SPX, -1.44% of nearly 13%. For the whole month, the index was down more than 8%.

March isn’t providing much relief for investors so far, with the Dow DJIA, -1.57% , Nasdaq COMP, -1.54% and S&P all bouncing around breakeven during Monday’s session.

Markets aside, Roubini said he believes there will be huge political ramifications, especially if/when the coronavirus blows up in the United States.

“You can’t build a wall in the sky,” he said. “I live in New York City and people there are hardly going to restaurants, cinemas or theaters, even though nobody there has been infected by the virus thus far. If it comes, we are totally f***ed.”

Does that mean a “perfect scare-scenario” for Trump?

“Not at all. He will lose the election, that’s for sure,” Roubini said. “This has always the case in history. Ford lost to Carter after the 1973 oil shock, Carter lost to Reagan due to the second oil crisis in 1979, and Bush lost to Clinton after the Kuwait invasion. The Democratic field is poor, but Trump is dead.”

For more from Roubini, check out this recent interview:

US Stock Markets Tank 30% – Will the Meltdown Continue?

We thought we had seen it all in the last week of February, but Financial Markets Meltdown 2 came unannounced at the start of this week. Before traders had time to have their second coffee, oil prices had lost a third of their value, stock markets headed for another correction of almost 10% and US bond yields plumbed depths that have never been seen before.

Panic about the potential onset of a full-blown oil price war early this week was added to an already toxic cocktail mix comprising the coronavirus (Covid-19), the ill-advised Fed rate cut last week and fears of a global recession.

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The result: a more than 30% decline in oil prices in early trade sent the financial markets into major meltdown yesterday (Monday 9 March). The extent of the selloff was so severe that trading on US stock markets was halted for 15 minutes after the S&P 500 fell more than 1,800 points shortly after the trading day began.

Western Texas Intermediate (WTI) oil prices raced down to about $31 dollars a barrel and Brent crude to about $33. This prompted European stock markets to repeat the same staggering 8%-plus selloffs experienced in the last week of.

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