TSX suffers biggest one-day plunge in eight decades

Canadian stocks plunged Thursday, with the benchmark index suffering its biggest loss since 1940 and closing at the lowest level in four years, as fear enveloped trading desks worldwide about the economic toll of the growing coronavirus crisis.

The S&P/TSX Composite plummeted 1,761.64 points, or 12.34 per cent, to 12,508.45 with every sector in the red. Since the index’s peak on Feb. 20, $830-billion of market value has now been wiped out in Canada. The impulse to sell left few safe havens; even gold and bitcoin tumbled. The energy sector was bloodied again, with the U.S. crude price falling 6 per cent.

Not since May of 1940, the month when Germany invaded France during World War 2, has the Canadian stock market seen a greater loss on a percentage basis in one day, according to Bloomberg data.

The losses in Canada on Thursday even outpaced Wall Street. After flirting with the level Wednesday, the S&P 500 index officially entered a bear market - a decline of 20 per cent from its most recent peak - as it shed 260.74 points, or 9.51 per cent, to 2,480.64. It was the U.S benchmark’s worst day since 1987. The decline for the TSX left it about 30 per cent below its record peak just last month.

Traders on Bay Street were left shell-shocked both by the magnitude of the decline and how quickly stocks have descended.

For Jason Del Vicario, a portfolio manager at HollisWealth in Vancouver, the situation is worse than 2008.

“In 2008, we didn’t see the markets tank this much this quickly until the fall of 2008 and there was time prior to that to put one’s ducks in a row,” he says. “What is amazing to me is we are seeing this volatility before any real economic or corporate earnings releases that start to demonstrate the full impact of this virus/downturn.”

But the impact on the real economy and on earnings would surely be felt in the days and months ahead, and many investors now believe a recession is inevitable.

“It will not be the end of the world but don’t fool yourself by not accepting that this will impact all sectors of the economy and has global market reach,” said Kash Pashootan, CEO and chief investment officer at First Avenue Investment Counsel Inc. "Welcome to 2008 version 2.”

At the opening, as was the case Monday, selling was so intense that trading was halted in North American markets. The panic started after stimulus efforts from the European Central Bank failed to calm investors alarmed by U.S. moves to restrict travel from Europe over the coronavirus pandemic. European shares took their largest percentage drop on record.

The New York Federal Reserve pumped more liquidity to banks, briefly reversing some of the day’s losses. It was the third substantial increase in repo support announced by the U.S. Federal Reserve this week, a sign the Fed is taking drastic steps to inject more liquidity into the banking system as markets show signs of stress.

The U.S. dollar rose indiscriminately, in yet another sign of market stress. The Canadian dollar tumbled to four-year lows.

In a televised address that also included support measures for the economy, U.S. President Donald Trump imposed restrictions on travel from Europe to the United States, shocking investors and travelers.

Traders were disappointed after hoping to see broader measures to fight the spread of the virus and blunt its expected blow to economic growth.

“The economy is going to grind to a halt in the next month and the recession risk is real now,” said Zhiwei Ren, managing director at Penn Mutual Asset Management in Horsham, Pennsylvania.

Trump said the United States would suspend all travel from Europe, except Britain and Ireland, for 30 days starting on Friday. He later said trade would not be affected by the restrictions.

Worries spread far beyond stocks to companies’ lines of credit and their ability to finance business activity in the short term.

Fear of the unknown “is gripping markets and it’s more impactful in the credit markets at the moment, liquidity has effectively evaporated,” said John McClain, a portfolio manager at Diamond Hill Capital in Columbus, Ohio. “People are looking ahead and saying what’s this world going to feel like when we’re all working at home.”

The European Central Bank approved fresh stimulus measures and temporarily dropped banks’ capital requirements to help the euro zone cope with the shock of the pandemic, but kept interest rates on hold, disappointing markets.

The VIX volatility index - Wall Street’s “fear gauge” - and an equivalent measure of volatility for the Euro Stoxx 50 hit their highest since the 2008 financial crisis.

Fed fund rate futures are now pricing in a 1.0 percentage point cut, rather than 0.75, at a policy review next week.

The euro weakened after the ECB stimulus announcement.

Demand for dollars via the currency derivative markets surged to the highest levels in years in a sign that coronavirus-induced economic stress is starting to manifest itself in a broad scramble for funding in dollars.

“Dollar liquidity is king in times of crisis and that is what the blow-out in swap spreads is telling us,” said Kenneth Broux, a currency strategist at Societe Generale in London.

He said this could mark a move into the next sell-off stage, which could mean a three-week-long worldwide rout in shares and riskier bonds giving way to a rush for dollars.

Darcy Keith, with files from Brenda Bouw, David Berman and Reuters