“There’s panic,” said Dan Krieter, an analyst at BMO Capital Markets. “We’re heading into what looks to be a global recession, including the U.S.”
In Asia, markets were mixed early on Tuesday, in an apparent sign that investors were trying to regain their footing, and futures markets were predicting Wall Street and Europe would open higher.
Oil prices also rose about 6 percent, though they remained well below levels from last week.
Still, the downward cycle — there are signs it is underway — might play out like this: As the virus disrupts manufacturing supply chains as well as travel, consumer spending would fall and businesses would falter, and stock prices would plummet. The threat to corporate profits would send investors in search of safe havens, like government bonds, sending those prices up and their yields down, in turn straining the banking industry. Banks would limit financing for businesses, which would cut production or lay off workers to hoard capital.
Already, investors have hustled to safety, shunning corporate bonds and driving up the financing costs for many companies. And as they piled into U.S. government bonds, long-term interest rates fell to historic lows; benchmark 10-year Treasury bonds, whose interest rates until last week had never sunk below 1 percent, were recently yielding half that.
Hoping to forestall that spiral, the Federal Reserve on Monday said it would increase the volume of short-term loans available to banks to make it easier for them to continue lending. It was the second time in a week — after an emergency interest-rate cut last Tuesday — that the Fed had moved to stem potential fallout as the coronavirus sent markets gyrating.
Even for people who don’t have money in the markets, the developments are ominous. Large and small businesses hire or fire workers and buy equipment and raw materials based on their own financial strength and their expectations for how the economy will perform in the future. As companies retrench, it affects workers and suppliers, which then have to tighten their own belts.
Layoffs rise; wages decline. Consumers spend less.
Businesses in need of cash would normally turn to their banks for help in moments like this. But as banks get squeezed by sliding interest rates, their ability and appetite to lend to struggling companies diminish — the type of situation the Fed was trying to head off by increasing its short-term lending. At the same time, panicky investors don’t want to buy risky corporate debt, severing another potential lifeline for many companies. Investors are also yanking their money from mutual funds that invest in leveraged loans, a risky type of corporate debt that has become a popular way for many companies to finance their operations in recent years.