Macroscope | Coronavirus crisis: what Boris Johnson can teach Donald Trump about calming investors’ nerves
- Unlike in 2008, this year’s turmoil is not rooted in the banking sector and sentiment is less bearish, but the current threat is harder for policymakers to counter
- Like the UK, the US must act decisively with both a monetary and fiscal package
While sentiment had steadily deteriorated over the past several weeks as investors began to fret about the economic effects of the coronavirus outbreak, the abruptness and severity of Monday’s sell-off stunned investors, prompting many analysts to draw parallels with the peak of the 2008 global financial crisis.
While such comparisons are misleading, for reasons outlined below, the magnitude of the moves in asset prices was staggering, showing the extent to which markets have moved into a new and more dangerous phase.
In stock markets, the S&P 500 lost more than 7.6 per cent on Monday, its sharpest fall since December 2008. The VIX Index, Wall Street’s “fear gauge” which measures the implied volatility of the S&P 500, surged to its highest level since the financial crisis. Global stocks are now on the verge of a bear market, having lost more than 18 per cent since their peak on February 19.
Yet, what was most worrying about Monday’s carnage was that it showed the speed at which financial conditions have been tightening. Another index from Bloomberg, which measures financial stress in the US, deteriorated at its fastest pace since the 2008 crisis, fuelling concerns about a full-blown credit crunch.