Why the FTSE 100 slumped by 3.5% today

After global stock markets crashed today, our head of markets studies the implications of coronavirus.

The disquieting developments of the impact of coronavirus have fired a warning shot to markets which had, to a large extent, previously been displaying some indifference to the outbreak.

The sombre realisation that cases outside of China could represent the early stages of a pandemic, with the lockdown in Italy adding to new reported instances in Asia and Korea, have not only ignited fears on the more important human level, but also that the economic impact could be more severe than initially envisaged.

Some of the warning signs had been in evidence in China in particular, with the announcement of planned stimulus measures to bolster the economy following on from a near shutdown in some parts of the country. More recently, any number of companies with interests in the region have turned cautionary, ranging from Apple (NASDAQ:AAPL) to Burberry (LSE:BRBY), Qantas (ASX:QAN) and Adidas (XETRA:ADS).

• Chart of the week: Stocks versus Cash
• How this AIM stock returned 3,500% so quickly

Meanwhile, the Chinese car industry has all but ground to a halt, with the net effect being that the first quarter could result in a contraction in the world’s second largest economy. Further supply-chain warnings can be expected from other affected companies in the following days, with the overall situation resulting in more circumspect investor behaviour.

Today’s steep declines in the US indices wipe out year to date gains for the Dow Jones Industrial Average (now down nearly 2%) and reduce the S&P 500 to flat. The Nasdaq remains up 2.2% in 2020, although this compares to a gain of 8.5% just last week. Indeed, the inexorable ascent in markets in the US, largely driven by the major technology stocks of late, had left some investors wondering whether it was time to let some air out of the tyres.

For the UK, the FTSE 100 has been a particular target for investors and stands down over 5% in the year to date, given its particular exposure to oil and mining as well as the obviously affected areas of tourism and travel. By the same token, and perhaps of some consolation to longer-term investors looking for an entry point, is the reminder that mark downs such as this can be indiscriminate as sentiment deteriorates, and that there will be certain sectors which will be less affected by the outbreak.

FTSE 100 chart

Source: TradingView Past performance is not a guide to future performance

Even so, the fact that the gold price is hitting multi-year highs is reflective of the current penchant of investors towards havens. Until there is some clarity on whether the virus has been sufficiently contained, the market will likely remain on tenterhooks.