TSX and Dow Jones lose another 10% as coronavirus sell-off continues

Stock markets in Toronto and New York plunged anew on Monday as investors continue to digest news of the coronavirus.

When stock markets go down by 7%, automatic trading halts kick in to calm the situation

The spread of COVID-19 has created turmoil in financial markets as investors digest the impact widespread quarantining and business shutdowns will have on corporate profits. (Frank Gunn/The Canadian Press)

Stock markets in Toronto and New York plunged anew on Monday as investors continued to digest news of the coronavirus and ran for the exits.

Fears about the economic impact of COVID-19 have gripped investors for weeks now, with the virus taking a financial toll, on top of the human one.

Stock markets in Asia and Europe were also down sharply Monday despite the U.S. Federal Reserve's weekend cut to its interest rate in an attempt to keep the economy running.

The decline in North America was almost instantaneous, with the TSX composite index losing so much in the opening seconds of trading that automatic "circuit breakers" designed to shut down trading during times of heavy selling kicked in. The halts mean both stock exchanges were shut down for 15 minutes for a breather in the hopes that investors would calm down.

They did not. When trading reopened, the selling continued, with the TSX closing down by 1,355 points, or almost 10 per cent. The Dow Jones Industrial Average fared even worse, losing 2,997 points or more than 12 per cent.

"When the circuit breakers kick in because of declines, it really highlights the uncertainty in the markets," said David Madden, an analyst with CMC Markets.

The reason for the panic selling was the novel coronavirus, as investors wake up to the serious economic consequences that the virus will have.

Investors worried about domino effect of business closures

Businesses have been closing their doors in an attempt to fight the spread of the virus. 

"Consumer spending will go down as people stay home because of the coronavirus," said Odysseas Papadimitriou, the CEO of financial literacy website WalletHub. "That will hit a number of industries particularly hard, such as the service industry, travel providers, live entertainment venues, movie theatres and more."

Investors are worried about the domino effect that all those related economic shutdowns will have on corporate profits, and by extension their stock prices.

"If a restaurant owner can no longer pay rent, the property owner might not be able to pay its loan, and the bank that made the loan might end up suffering as well," Papadimitriou said.

The U.S. central bank said its interest rate would stay low until the economy shows it can survive a near-shutdown of activity in the United States. The Fed's decision was designed to calm markets, but one observer says it may have had the opposite effect. 

"It seems to have sparked more questions than answers for investors, particularly what has spooked the Fed so much that they couldn't wait until their regularly scheduled policy decision on Wednesday for this announcement?" said Colin Cieszynski, chief market strategist at SIA Wealth Management in Toronto.

"In my opinion, the biggest problem for investor confidence is not knowing how bad things could get and how long disruptions could last."

The Bank of Canada on Friday also cut its key interest rate target by half a percentage point, to 0.75 per cent, as part of a co-ordinated plan by the federal government to help the economy. Canada's central bank is widely expected to cut again, especially after the Fed did so.

"After the Fed's action last night, the bank is almost certainly going to cut rates again this week," said CIBC's foreign exchange strategist Bipan Rai. "There's no reason for the bank to have a benchmark rate that is higher than the Fed's ahead of an upcoming recession and with oil prices this low."

Economists have warned that Canada is headed for a recession this year due to the impact of COVID-19 and a crash in oil prices. Canada's main stock index posted its biggest one-day drop on record last week. It followed that up with a small rebound the next day. 

Large swings up and down have been the norm of late, as investors react to the uncertainty that this worldwide pandemic presents for the economy.

With files from The Canadian Press