This past week has been a bloodbath for investors – especially when it comes to Canadian junior exchanges like the TSX Venture.

With fears over the economic impact of coronavirus rising, the TSX Venture is experiencing historic capitulation, having fallen from 582.55 on February 21 to as low as 479.09 before closing at 495 on February 28. While it wasn’t the root cause, a trading outage between mid-Thursday and Friday morning certainly didn’t help investor sentiment…

John McKenzie, interim chief executive officer and chief financial officer of TMX Group told BNNBloomberg in an interview that it was unprecedented order levels (i.e. buys, sells, and cancels) that led to Thursday’s outage of the TSX. Despite having tested for order levels “beyond Thursday’s”, McKenzie stated that order levels above 190 million (100 million more than an average trading day) were simply too much for the TSX Venture to handle. McKenzie went on to assure investors that “additional capacity” has been allocated for the junior exchange as diagnosis of the problem continues.

Technical issues aside, the junior exchange is now performing worse today than it did during the height of the 2008 financial crisis (for reference, the junior exchange’s lowest close in 2008 was 697). And with the TSX Venture just roughly 30 points shy from its all-time low in 2016, it appears the strong foundation that the junior exchange had at the start of 2020 appears to have all but crumbled away.

All of this begs the question: what’s next for the TSX Venture?

For the time being, risk-off trade – a key determinant of investment activity on the TSX Venture – is at a standstill. What’s more, not even gold stocks (which have a significant weighting on the TSX Venture) appear to be safe from the carnage. The price per ounce of gold fell 4.63% from approximately $1,640 to $1,564 on Friday alone.

The best explanation for why the price of gold is falling while we’re in a risk-off environment comes from Kitco,

“There is an old saying in trading markets that when times get really dire and anxiety is high, you don’t sell what you want, you sell what you can.”

And that,

“. . .remember that gold’s price is mostly driven by consumer demand. China is a leading gold consumer, and the coronavirus outbreak’s negative impact on the Chinese economy is most certainly going to crimp Chinese citizens’ purchases of gold and silver.”

The Future of the TSX Venture Depends on the US

What once seemed like a promising fresh start for the TSX Venture has spiralled into a chaotic mess – seemingly overnight. What’s more, risk reversal appears unlikely given the growing number of coronavirus clusters around the world. At this point, the performance of the TSX Venture will likely depend on how well US markets perform; or in other words, how well the US can contain the spread of Covid-19.