Summary and Price Action Rundown
Global financial markets are experiencing significant turmoil this morning as plummeting oil prices compound already heightened fears over the economic toll of the coronavirus outbreak, adding to the potential for systemic market stresses. S&P 500 futures point to a 4.9% plunge at the open, which would greatly extend the index’s year-to-date losses of 10%. Last week featured dramatic price swings driven by the waxing and waning of investor optimism over prospects for synchronized stimulus from global central banks and governments to counteract the economic costs of the coronavirus epidemic. But the start of an oil price war between Saudi and Russia over the weekend (more below), alongside a continued barrage of worrisome news from the expanding coronavirus epidemic, intensified risk aversion from the outset of trading last evening. Oil prices have crashed over 20% this morning, the worst decline in decades, with Brent crude below $36 per barrel. Equities in Asia and the EU are down between 3% and 6%. Treasuries are extending their torrid rally, driven by safe haven demand, a grim economic outlook, and rising expectations of Fed easing, with the 10-year yield plunging to a new record low 0.44%. Meanwhile, the dollar is steady below recent multi-year highs.
Saudi Targets Russia in an Oil Price War
Saudi responded aggressively to Russia’s refusal last week to join OPEC’s efforts to support the oil market, upping production and slamming global crude prices. Last week’s OPEC summit ended in acrimony as the cartel failed to secure cooperation from Russia for a 500k barrels per day (bpd) reduction from non-OPEC producers to augment their additional 1 million bpd output curb. Saudi upped the ante on Saturday, as it signaled a dramatic increase in output above 10 million barrels per day (bpd), with sources suggesting that production could rise to a record 12 million bpd. Reports indicate that Saudi Aramco is offering significant discounts to buyers, undercutting Russia. Oil markets are under severe duress this morning, with international benchmark Brent crude trading around $36 per barrel, after tanking to nearly $31 earlier in the session, while US benchmark WTI is around $32 per barrel, with these levels being roughly four-year lows for both. Shares of US energy companies are posting deep losses in pre-market trading, while analysts will monitor indications of credit stress among US shale producers, who represent a significant segment of US high yield debt. For context, the traditional benefits of lower oil prices to the US economy now are counterbalanced by the damage inflicted upon the shale oil industry and the regions dependent on it, as well as the attendant stress on producer creditworthiness, which in turn pressures the high yield debt market, leveraged loans, and regional banks in particular.
Global Markets Gripped by Fears of a Coronavirus Pandemic and Global Recession
Investors are looking to additional coordinated government efforts to stem the market rout, despite uncertainty over the efficacy of even well-synchronized economic support measures, as extreme market price action threatens to become self-reinforcing, disorderly, and systemic. While investor sentiment had found some support last week from the improving coordination of increasingly robust action by central banks and governments, the focus has now shifted back to the grim news of the spreading epidemic. Rising numbers of infections in the US, resulting in a declaration of emergency in California and New York, alongside a massive lockdown of northern Italy and other widening outbreaks around the world, are dominating the headlines. Tightening travel restrictions at the country and corporate level, cancelled conferences, and warnings from company heads about the intensifying fallout of the epidemic are driving fears of global recession. Though investors are cognizant that already-low interest rates render central bank cuts less impactful, and thus are highly attuned to the increasing emphasis on fiscal stimulus, futures markets are reflecting 75 basis point (bps) of cuts by the March 18 Fed meeting, with around 100bps of total additional easing reflected by July. Some analysts project that rate cuts will be enacted at another emergency meeting this week and will be accompanied by an increase in liquidity operations, including the transformation of the ongoing asset purchase program into official quantitative easing, amid increasing cash demand.
Investors Monitor Growing Signs of Systemic Market Stress – With volatile equity markets, plunging oil prices, and historically depressed Treasury yields reflecting an increasingly grim economic outlook, analysts are wary of fundamental strains in global financial markets. Systemic risks, like those that manifested themselves in the global financial crisis in 2008, involve threats to the functionality of markets and availability of liquidity, as opposed to standard market stress, which results in adverse but orderly price action. Specifically, analysts are monitoring possible early signals of pressure in short-term funding markets (which first emerged in September), overseas dollar liquidity, credit market metrics, and interbank funding.