‘This is basically panic selling’ — stock markets plunge as coronavirus fear spreads

North American stock markets were halted shortly after opening on Monday morning as circuit breakers designed to slow down panic selling kicked in within minutes of opening.

The NYSE, Nasdaq and TSX all hit what’s known as a level 1 trading halt within minutes of opening on Monday morning. Such a halt automatically suspends all trading on the market for 15 minutes after a decline of more than seven per cent.

A level 2 halt is automatically imposed after a decline of 13 per cent, for another 15 minutes. If the decline hits 20 per cent, a level 3 halt comes in to shut down trading for the rest of the day.

The TSX lost more than 1,400 points, or eight per cent, within minutes of opening, so the Canadian index’s circuit breaker was triggered. When it reopened, at one point, it was down as much as 1,600 points, or more than 10 per cent. That’s the worst day for the TSX since 1987.

The trading halts were lifted 15 minutes after being implemented and the selling continued both in the U.S. and Canada — although not by enough to implement a level 2 halt.

“This is basically panic selling,” said Peter Cardillo, chief market economist at Spartan Capital in New York. “There’s a lot of fear in the market and … it’s an indication that a global recession is not far away.”

Wall Street’s so-called “fear index,” known as the VIX, which spikes during times of volatility, jumped by 14 points to 56.61. That’s its highest level since 2009, during the financial crisis.

The panic started on Sunday evening after Saudi Arabia kicked off an all-out price war in the oil market, announcing it would be removing any production caps. That move sent the price of crude crumbling more than 25 per cent, and came on top of existing fears over the coronavirus currently spreading around the world.

Canadian energy companies sold off hard. Suncor lost more than 25 per cent of its value. Cenovus was at one point down by almost half.

Flight to safety

Bond yields in the U.S. and Canada fell to their lowest levels on record as investors fled for safety. Investors flock toward things like bonds because they are perceived to be safer than other assets, as governments are unlikely to default on their loans.

All that bond buying pushes up their price, which counterintuitively drives their yields down — because governments don’t have to offer a very good interest rate to find a willing buyer for their debt.

At one point on Monday morning, the yield on the Canadian government’s 10-year bond dipped below 0.3 per cent, its lowest level on record. That means a buyer of that bond is effectively willing to loan the government $1,000 for an entire decade, and is only going to get $3 for their troubles. With inflation factored in, they’re actually losing money. But they are willing to accept that meagre return because it is preferable to other options where they think they’ll do even worse.

The U.S. 10-year is telling a similar story, falling to a record low of 0.3228 per cent at one point on Monday morning

“The lower it does go, the more people are likely to panic even further,” said Rick Meckler, a partner with Cherry Lane Investments in New Jersey. “The more it goes down, the more people will be nervous about it.”

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