The toxic combination of an oil price collapse along with escalating coronavirus fears is setting the scene for one of the wildest days in years for global markets and US indices.
Panic selling is engulfing the markets as traders attempt to figure out how the oil price war and the rapid spread of coronavirus and the associated supply-demand shock will impact the global economy.
Indices in Europe have plunged sharply in the European session. The FTSE experienced losses of 8.5% at its worst and US index futures have plunged 5%, indicating a sharp fall on the open. The panic exists because traders cannot quantify either the oil price war or the coronavirus impact. Markets hate uncertainty and recession fears are growing, fanned further by dismal data from China
Over in the US, futures trading was suspended in the Asian session on limit down after the S&P fell 5% making for a very uncertain US open.
What is limit down or circuit breaker?
A limit down price is the maximum sell-off permitted under NYSE rules in a market on a single day of trading. Once this level has been reached, the market is then suspended to prevent significant volatility and potential panic selling. A limit down price is typically determined as a percentage decline in a given market, rather than a nominal decline in price.
Circuit breakers levels
There are three circuit breaker levels, when declines in the S&P breach 7% and 13%, trading will pause for 15 minutes. A 20% decline would shut trading for the rest of the day under current NYSE trading rules.
Not the first time
This is not the first time that the markets have experienced a limit down. US equity futures trading were limit down after President Trump’s surprise 2016 election. Whilst there was significant volatility on days following the results, this actually calmed relatively quickly and saw the US stock markets rally across the following 4 year to reach an all-time high in February.
On the other hand, limit down was also experienced in the 2008 financial crash. The markets plunged as traders feared the banking crisis would lead to a global recession, which it did.
Recession coming?
The one-two punch of an oil price war, coronavirus outbreak escalation, combined with dismal data from China has investors fearing a global recession. It is impossible to tell right now how this will pan out. Limit down does not in itself mean that a recession will pursue. However, the bond market is pointing to some dark days ahead.
Circuit breaker level chart S&P
