Why are financial markets swinging so wildly in response to the novel coronavirus, COVID-19? Yesterday I spoke with Michael Knox, Chief Economist of Morgans, who thinks it’s related to the machine trading programs which dominate financial markets. Today, I’ve published our conversation as the latest Economics Explained episode COVID-19, machine trading & financial markets with Michael Knox.

Use these (approximate) timestamps to jump right to the highlights:

• 0:00 – discussion begins with me referring to Michael’s recent podcast/article The revenge of the machines which begins “The market is being sold down by machine trading programs focused on momentum.”
• 4:00 – Michael says recent market gyrations have “nothing to do with fundamentals….we’re in a situation because of the epidemic, because of the emergency that only happened once every hundred years or every 50 years – you can’t build a model of something like that. So inherently, what those trading models are acting on is the momentum signal…”
• 7:00 – beginning of discussion on market liquidity
• 11:00 – Michael discusses the relationships between liquidity, price discovery, and market volatility
• 15:10 – Michael notes re. COVID-19, “On this occasion, you had a change, which was caused by a once in 50 years shock or once in 100 years shock. The market doesn’t have that kind of memory of data to be able to price that in.”
• 16:15 – discussion of valuation of shares/stocks
• 18:15 – what is momentum?
• 24:20 – discussion of fair value of Australian sharemarket and Australian economic outlook

Nothing in this podcast should be considered financial advice, and it contains general information only.