Has Corona Virus ignited a ticking timebomb?
In today's article we would like to touch upon some interesting things that have been happening in the financial markets. First, we are all aware that the Corona Virus has already been expanding to multiple countries and have already infected various people. This is of course not good for the markets as the markets thrive on economic activity. When people consume, the companies make a profit and can reinvest it into the economy back to the people. This cycle is what makes an ecosystem stable and can lead to increasing equity prices. Now with the virus, people stay at home and economic activity diminishes, resulting in uncertainty. Investors do not like uncertainty and therefore decide to sell.
According to Callum Thomas, the US stock markets are highly leveraged, even higher than in 2007/2008. This is because of the rising popularity in option trading speculation and higher volumes in the futures markets. These two financial products are leveraged, which can cause instability if the balance between the volume of the underlying asset and the financial derivative is not taken into account. As often discussed during the MarketTradersTV livestream, margin calls (or a liquidation) occurs when someone's position needs to be covered because the broker discontinues the confidence to lend you money and therefore claims your available equity. A reason why the stock markets have been going down so sharply can be explain by this phenomenon that people need to close positions to cover their margins. It can also be explained by the fact that 'everyone' is trading in derivatives and not in the underlying asset, which results in no liquidity. Therefore, price discovery of stocks become more volatile. As a results, we have also seen the uptrend of algorithmic trading, and these algos trigger further selling if the prices drop. Altogether, it creates the perfect combination to assess the sharp decline in prices in the last couple of trading days.
Furthermore, ETFs (Exchange Traded Funds) are being sold at large scales. This results in companies like McDonald's and Coca Cola to drop with the market, while these companies are 'recession-proof'. This again, is another facet of why there is less liquidity in the stock market. But has the Corona Virus initiated this or what it bound to happen? I believe that regardless if you have been a trader for 50 years or if you're Donald Trump, you cannot say with certainty that the Corona Virus is the sole reason on why the markets are going down. It sure has impact, but it is not the only affecting variable in the game, hence I mention some other crucial factors that should be taken into consideration. In an article 4 month ago on BitcornTimes, I mentioned that the markets are becoming riskier than ever. Personally, I have not shorted the market, as I try to hedge my personal portfolio with both short and long positions.