As the novel coronavirus continued to spread this week and became a pandemic, financial markets were in a tailspin, raising concerns again about their ability to function in times of crisis. This is the first major test for the markets since reforms introduced after the financial crisis prevented banks and brokerage firms from providing liquidity during a crisis – in other words, being a buyer and seller for customers when they need it most.
The market dislocation is exacerbating volatility across all assets as investors have difficulty determining what they are actually worth, while the economic outlook is worsening day by day and the actual impact of the virus is still subject to uncertainty.
The evaporation of liquidity was seen in virtually all asset classes, but it was most noticeable in securities that normally serve as a haven and whose prices rise during a turmoil. This led to strange and disturbing movements as traders watched the long-standing cross-market relationships dissolve.