Last week, as a consequence of the growing fear over the economic effects of coronavirus, global stock markets have had their worst week since the financial crisis of 2008.

Wall Street has slumped from record-breaking highs to the lowest point since 2016, with more than $5tn (£3.9tn) wiped off the value of global markets over the past week alone.

On Thursday, the Dow Jones Industrial Average plummeted 1,190 points, with Wall Street suffering its worst one-day fall ever, while at the same time The FTSE 100, the index that refers to the 100 companies with the largest market capitalization listed on the London Stock Exchange, wiped off £206bn, with shares in airline companies which have been among the hardest hit.

S&P500 index performance — source: Macrotrends

Around the world, other major stock exchanges have been through terrible weeks, like for example the DAX in Germany with a weekly loss of 12%, or the Nikkei 225 in Japan which has lost about 10% in the same period.

This huge sell-off has been fueled for the most part by the widespread fear that measures that all around the world have been taken to contain the virus would hamper corporate profits and economic growth.

Investors all around the world rushed to buy assets considered safe havens in times of stress — including government bonds and gold — sending the yield of US Treasury bonds to the lowest level on record.

The Fed

In the meantime, on Friday, the Federal Reserve chair, Jerome H. Powell, moved to soothe investors.

In fact, he said that even though “the coronavirus poses evolving risks to economic activity”, the Fed “is closely monitoring developments and their implications for the economic outlook”, and moreover, that the central bank will use its tools and “act as appropriate to support the economy.”

This is the main reason why many researchers expect the Federal Reserve to quickly — and possibly deeply — cut interest rates in the face of worsening coronavirus news and market sell-offs.

At the same time, however, other researchers like those at Nomura warned that “there is little that monetary policy can do to limit the immediate downside risk for the U.S. economy.”

Growth estimates cut

Estimates of economic growth for this year have been cut for the United States as well as around the world, with projections that however vary widely, because the spread of the virus and the damages that it could cause to the economic growth are hard to estimate.

Bank of America researchers, in a note titled “Gloom but not doom”, reduced their forecast for 2020 growth in the United States by 0.1 percent, to 1.6 percent overall.

Moreover, Goldman Sachs researchers said that “the risks are clearly skewed to the downside until the outbreak is contained”, and then marked down their forecast by 0.1 percent, with growth lagging in the first half of the year, then rebounding.

Wall Street fear is extending beyond stocks

For the past week, assets like government bonds and goldhave attracted huge purchases by global investors, as in times of stress, they are considered as safe heavens.

This massive increase in demand for government bonds has sent the yield of US Treasury bonds to the lowest level on record.

Moreover, the iShares iBoxx High-Yield Corporate Bond Exchange Traded Fund, which is the biggest United States junk-bond fund, has plunged by about 4 percent since Feb. 20.

High-yield debt, which is extended to companies viewed as more likely to fall short on payments, is usually the first to go bad if companies run into trouble. If coronavirus makes credit hard to come by and causes cash flows to dry up, for example, firms that are highly leveraged with shaky prospects could fall behind.

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