Wall Street experienced the strongest collapse in two years on Monday, showing a 3.5% drop in key stock indices. European indices faced a similar failure, returning to levels of early February.
At the beginning of the month, the Chinese authorities managed to calm the markets by abundant liquidity injections and promises of fiscal stimulus. Italy is now choosing a similar tactic, stating that it is considering various incentives, including mortgage holidays in areas particularly affected by the coronavirus. All these measures bring calm back to the markets, but they are hardly a solution to the central problem.
Investors should be prepared for the new sudden index drops if new facts of coronavirus spreading across countries and regions emerge.
If we look at the situation in the short-term, panic sales have stopped. On Tuesday morning, indices are bouncing back from local lows reached the day before. The Nasdaq seemed attractive to buyers after the decline to 9000 and touching the 50-day average. The Dow Jones 30 enjoyed the influx of buyers after dipping to 28,000 at the end of the day on Monday. The Nikkei225 adds 2.8% against Monday’s low, also gaining support from the 200 SMA and proximity to the round level 22000.
However, the significance of these market movements should not be overestimated. The dynamics of the beginning of the day on Tuesday is more like an attempt by investors or algorithmic trading robots to buy at a discount unnecessarily drastically falling indices and stocks. At the same time, the problem of coronavirus proliferation is far from being solved, as well as logistical problems related with suspension of factories and the breakdown of components supply chains. Against the backdrop of such conditions, the rebound may not last long.