Markets tumble, El-Erian says don't buy the dip

Markets fell sharply for a second day on Tuesday.

The S&P 500 plunged 3.0 percent, the STOXX Europe 600 fell 1.8 percent and the Nikkei 225 sank 3.3 percent.

Markets fell as the number of worldwide cases of COVID-19 rose to 80,238 with at least 2,700 deaths.

Becky Liu, head of China macro strategy at Standard Chartered Bank, said that China’s first quarter GDP is expected to deteriorate “very materially” to only 2.8 percent.

Federal Reserve Vice Chairman Richard Clarida said on Tuesday that while it was still too soon to tell what the impact on the US economy might be, the central bank will “respond accordingly.”

Indeed, many economists think that the Federal Reserve will be forced to cut interest rates soon.

“Sitting still would be seen as being tone-deaf,” said Carl Tannenbaum, chief economist at Northern Trust.

Others, though, point out that a rate cut may not be the answer as it primarily addresses demand shock.

“Because of its genesis in China, coronavirus is both a demand and a supply shock to the global economy,” said Brian Nick, chief investment strategist at Nuveen, in a Tuesday note.

Erik Nielsen, group chief economist at UniCredit Bank, said that markets have reacted in “a rather casual, and inconsistent, way” because of “apparent confusion about the nature of demand versus supply shocks and the (limited) effectiveness of policy stimulus in these circumstances”.

Indeed, Allianz chief economic advisor Mohamed El-Erian told CNBC that “this is different” and “I would continue to resist, as hard as it is, to simply buy the dip”.