Editorials

Algorithmic Trading and Coronavirus Casusing Flash Crashes

Algorithmic trading and the Coronavirus are causing extreme volatility.
Markets vacillate from stimulus from central banks and fear of recession caused by a global economic slowdown.

The majority of trading today is done by machines. Approximately 40 percent is done automatically by computers using algorithm programs.  Approximately 40 percent is done by index funds. With robot trading, fundamentals are largely irrelevant. Programmed trading tends to follow price and volume up or down.  When markets drop quickly sellers are forced to sell because of margin calls.  When markets rise, programmed trading with leverage, follows trends to reap profits. 

While deaths from the Coronavirus epidemic are minor in comparison to the normal flu, the novel virus has been blown way out proportion by the mainstream media. Because the media is tracking this epidemic in minutia, the latest news of new outbreaks has resulted in the closing schools, public events, and less travel.  Supply chain problems have occurred because of travel restrictions in China. Reduction in demand and less supply is slowing global growth.

The world's central banks have panicked, because the credit markets are flashing world wide recession, with historically low bond rates and widening credit spreads.  Central banks have countered with even lower rates. This tends to cause a spike in equity prices.  As a result markets swing between euphoria over lower interest rates and flash crashes because of the concern of $225 trillion dollars in global debt, and economic slowdown. Coronavirus will eventually peter out.  The question is whether we will have a global recession or whether central banks can kick the can down the road, and keep the bubble afloat.  Zero interest rates will hurt savers and banks, and should give gold a boost. I am long Gold Resource Corp.   
 

© 2016 - 2020 Steve Johnston - All Rights Reserved.
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