Markets shuddered Monday in the face of a price war for oil and the economic fallout from the coronavirus outbreak, with frightened investors seeking shelter in the safety of government bonds and propelling yields to unprecedented lows.
Futures tied to the Dow Jones Industrial Average index retreated 4.9%, pointing to a decline of over 1,200 points in the blue-chips gauge after trading opens in New York. The futures contracts earlier hit the 5% maximum allowed in a single session, breaching the limit for the first time since shortly after President Trump’s 2016 election victory.
Saudi Arabia’s decision over the weekend to instigate a price war as it escalates a clash with Russia sent oil prices to their lowest levels since 2016 and raised fresh concerns about the risks tied to heavily indebted energy companies in the high-yield credit market. The kingdom cut most of its oil prices and plans to boost output.
The plunge in crude added to two weeks of turmoil in equity and credit markets as investors have grown increasingly concerned about economic growth stalling. Crude prices, along with U.S. government bond yields, are typically viewed as key barometers of economic health and confidence, said Gregory Perdon, co-chief investment officer at private bankers Arbuthnot Latham.
“There has always been an assumption that when the oil price collapses the world is going to become a darker place, whether that is driven by the demand side or supply side,” Mr. Perdon said. The latest tensions put the oil market in somewhat uncharted territory with pressure in terms of both supply and demand as the coronavirus epidemic threatens to sap businesses’ appetite for energy.
Manic MondayA selloff in Asia-Pacific stocks gathered steam on Monday.Year-to-date performanceSource: FactSetAs of March 9, 4:08 a.m. ET
%Hang SengS&P/ASX 200NikkeiDec. 30Jan. 13Jan. 27Feb. 10Feb. 24March 9-20-10010
U.S. government bonds, which have already rallied to unprecedented highs, extended gains. The yield on the 10-year Treasury, which moves inversely to bond prices, dropped to 0.434%. The 30-year yield fell below 1%, reaching 0.858%.
“The fear today is about a global recession,” said Thomas Hayes, chairman of Great Hill Capital, a hedge fund-management firm based in New York. “If Russia does not come back to the table soon, investors worry the default risk and credit spreads widening will lead to tighter credit and even a recession.”
Public-health authorities are escalating efforts to contain the coronavirus outbreak, leading to a drop in business activity and curtailing global trade. The number of confirmed coronavirus cases has exceeded 110,000, with over 3,800 fatalities globally. At least eight American states including New York have declared states of emergency as infections spread to new parts of the U.S., and Italy quarantined some 17 million people.
Stocks in the European energy sector led markets lower Monday, with BP plummeting over 17% in London. Anglo-Dutch firm Royal Dutch Shell, Norway’s Equinor, Italy’s Eni, the U.K.’s BHP Group and France’s Total were also among the big decliners.
“It’s a falling knife situation,” said Esty Dwek, head of global market strategy at Natixis Investment Managers. “You don’t need to be buying on a day like today.
Ahead of the opening bell in New York, Chevron and Exxon Mobil dropped over 10% in premarket trading. Smaller energy companies plummeted even more, with Devon Energy, Occidental Petroleum and Marathon Oil stocks dropping over 25%.
The price war between major oil producers is “throwing petrol on the fire” at a time when investors are struggling to understand how deeply the outbreak will impact global supply chains and consumer spending, according to Lyn Graham-Taylor, a rates strategist at Rabobank.
“We have got a massive demand decline brought about by the virus and now you’ve got headline inflation going through the floor: all combinations that say we need to do more easing,” Mr. Graham-Taylor said.
Over in Europe, the pan-continental Stoxx Europe 600 index dropped over 6% with key equity benchmarks in the U.K. and France entering bear-market territory.
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