Australian shares approaching bear market as coronavirus panic sets in

Australian shares are now teetering right on the edge of bear territory in a market ripe with rumours.

Market watchers say investors are showing signs of panic. Picture: AAP.

Sharemarkets joined crude oil in a market meltdown in early Asian trading on Monday following the collapse of OPEC talks on Friday

Australia’s S&P/ASX 200 share index dived 5.5 per cent to a 12-month low of 5881.0 at the open and kept falling, finishing down 7.33 per cent at 5760.6, meaning the index has fallen 19.5 per cent from its record high close of 7163 two weeks ago.

That in turn means the Australian sharemarket is right on the verge of a bear market, defined as a 20 per cent or greater fall from a peak.

Meanwhile, US S&P 500 futures are down 4.9 per cent after earlier hitting an automatic trading limit once they fell 5 per cent.

Across the rest of the Asia Pacific, China’s Shanghai Composite was down by 2.6 per cent at the local close, while the Hang Seng was sold off by 4 per cent and Japan was the worst performer with a decline of 5.8 per cent.

The collapse in share values comes as a collapsing oil price adds to the risk of a credit crunch amid the worsening global coronavirus pandemic.

Brent crude oil futures dived 30 per cent to a four-year low of $US31.02 after a breakdown in supply talks between OPEC and Russia threatened to trigger an all-out price war. Brent crude oil futures are now down around 20 per cent at $36.10, driving a 17 per cent fall in the S&P/ASX 200 Energy sector.

Investors have scrambled for safe havens, with spot gold prices surging 1.7 per cent to a seven-year high of $US1703 oz alongside demand for US Treasury bonds, with the yield on 10 year bonds falling as much as 28 basis points to a record low of 0.4826 per cent.

Market watchers say the sell-off in risk assets reminiscent of the global financial crisis of 2008.

There is also talk of a “market maker” – defined as a trading house such as a brokerage that is also a market participant itself - or a bond fund, “blowing up”. But the veracity of this speculation could not be verified on Monday.

“(There’s a) lot of talk of one of the largest banks in the world had their trading desk blow up this past week due to their massive bond short,” says Chris Weston, head of research at Pepperstone.

Some aspects of the current sell-off are “worse than the GFC”, according to a broker contracted by The Australian.

“It’s definitely panic … this is (at the) GFC level (of panic),” he said. “There’s a lot of option margin calls and margin lending selling.”

“Everyone is panicking at the wrong time. I’m actually looking at buying in the next few days.”

The trader also cited talk of “a market-maker blowing up, related to the volatility in the VIX.”

The VIX index, which measures volatility, hit an 11-year high of 54.39 per cent on Friday before closing at 41.94.