In a stockmarket as uncertain as this, anything could cause next panic

News, good and bad, on Gilead’s remdesivir drug is causing wild swings on the stockmarket Picture: AP

When the coronavirus crisis first started, it was immediately apparent that it would be like no other. The stimulus money has bought us time, but not much else. And the longer the virus prevents all of us from doing what we usually do, the greater the pressure on financial markets is going to grow.

We got a hint of that when the price of oil turned negative. We can talk all we want about how it was just one futures contract, that it was caused by technical factors due to that contract’s expiration and the lack of storage for the oil that owners of those contracts would have to take delivery of. But just think about how strange that is: if you owned oil, you had to pay someone to take it from you.

The stockmarket’s response was even stranger — stocks fell hard for two days: first, the ones with the most exposure to oil, then everything else — then started to bounce back. By the end of the week, the energy sector had turned positive for the week, and oil was almost an afterthought. It should be considered a warning. “When assets like oil swing wildly, we pay attention,” writes Lindsey Bell, chief investment strategist at Ally Invest.

As well we should. The oil patch had some big problems even before the coronavirus came along, but it wasn’t the only sector under fire.

And the longer the virus forces economies around the world to operate at a fraction of their cap­acity, the more other problems will crop up. “If the economic collapse accelerates and individual markets come under extreme pressure (like oil this week), downside risk will increase,” writes Evercore ISI strategist Dennis DeBusschere.

Some of the possible hot spots are obvious. US Senate majority leader Mitch McConnell highlighted one when he said he was “in favour of allowing states to use the bankruptcy route”. With so much of the economy shut down and fewer tax dollars coming in, American state budgets are getting squeezed. And it isn’t just states that are having problems — they stretch to municipalities of all shapes and sizes.

Europe is also a mess. Germany is spending massively to support its own economy as the EU tries to agree on some sort of fiscal package for its weaker members. At its meeting this past week, the EU bickered about whether the money should come as loans or grants — and left without a solution.

Emerging markets are under obvious pressure. Turkey’s lira has dropped more than 14 per cent this year, while the Brazil real has fallen 27 per cent and the Russian rouble 17 per cent. Those are massive drops, and normally they would at least have made exports from those countries cheaper. But since there are few exports, all they are doing is putting a strain on the countries’ budgets.

Dare I go on?

We could add junk bonds, the potential for food shortages, small business bankruptcies, and a slew of other problem areas to our list.

The longer the coronavirus keeps a lid on economic activity, the greater the potential that anything could become the next flashpoint. When asked where the next blow-up might come from, DeBusschere said emerging markets were “at the top of my list. But other than that, it is about the unknown.”

Against that backdrop, it seems almost ridiculous that the S&P 500 is so much higher than its March 23 low.

But then again, maybe not.

Consider the trial of Gilead Sciences’ remdesivir, a potential treatment for COVID-19, causing the Dow to swing in both directions, with at times a 400-point gain disappearing in an instant.

It isn’t every day that drug-trial news can move markets like that, suggesting the market knows that anything that can get economies up and running that much sooner can make a massive difference. It’s a race we can’t afford to lose.

The is an edited version of an article which first appeared in Barron’s