Black Monday: what happened?

Many of you remember the infamous Black Monday crash of 1987. Some of us are old enough to have been personally affected by that crash. We saw tons of movies that chronicled that historic day, which saw the index markets fall more than 19% in a single trading day. Currently, with the markets in the midst of a storm with regard to that Corona virus and with no real solution, we are seeing panic reach these levels once again.

This Monday was historic, as we saw that oil, gold, the S&P500 and many indices around the world have seen big drops. Oil fell by more than 19%, the FTSE by 7%, gold reached $1,699, a level not seen since the end of the crash 12 years ago. We have seen several exchanges issue downward limit orders, where trading was halted to regulate order flow. Yesterday, the markets reached unusual levels of volatility and traders chased each other to participate in large movements.

So what happened? The virus itself is the main culprit, but it was the human reaction to the situation that really created a sense of hysteria. In Italy, the government first introduced fiscal stimulus measures to alleviate the panic. Mainly companies that were losing revenue, 20% or more. This had little impact and the spread of the virus led to a second stage, where the northern part of the country was quarantined, and eventually the whole country was placed in a form of self-isolation. Italy is important because it is now the second most affected country, with nearly 9,000 people infected and over 600 deaths reported.

Europe's markets

With the situation now firmly entrenched throughout Europe, markets such as the FTSE and CAC have all suffered. The FTSE reached its lowest point since February 2016, essentially wiping out several years of gains since the beginning of the year when news of the virus began to spread. The graph below is ultimately a reflection of what many long-term asset investors have seen, many of whom have been unable to hold their positions due to increasing losses.

Commodity markets

Commodities have been extremely volatile. In general, this statement still rings true, given all the factors that influence commodity prices. The price war with OPEC, particularly with Saudi Arabia and the Russians, was the latest catalyst. As demand for oil weakened due to the virus, leading to a slowdown in global travel and tourism, prices suffered. At the beginning of the week, the decision was made: the best solution for a low price was to bring the price even lower, which meant that demand could increase, as prices were reduced. Whether this works remains to be seen, but the graph below shows the extent of the price reduction.