- Stocks take a big step lower as oil price war adds to worsening coronavirus outlook
- Carnage engulfs the oil sector
- T-note yields plummet on recession expectations and oil price collapse
Stocks take a big step lower as oil price war adds to worsening coronavirus outlook — The global stock markets on Monday plunged as the coronavirus continued to spread quickly across the world and cause major business disruptions. Quarantines, voluntary and otherwise, have now moved well beyond China. Italy’s government, for example, is now trying to put its entire country under quarantine and Israel implemented a 14-day quarantine on all visitors arriving in the country by air. U.S. health authorities are slowly stepping up their warnings to Americans to restrict their movement and engage in social-distancing measures.
The markets today will be watching the White House and Congress for any signs of stimulus measures. There is talk about guaranteed sick pay, and President Trump later Monday said he will propose a payroll tax cut. Treasury Secretary Mnuchin and White House economic advisor Kudlow are due to meet with Senate Republicans today at a closed-door caucus lunch to discuss stimulus measures. The White House announced late Monday that President Trump today will hold a news conference on economic measures.
Meanwhile, the S&P 500 index (SPX) on Monday plunged to a 9-1/4 month low and closed the day sharply lower by -7.60%. On yesterday’s low, SPX corrected lower by a total of -19.4% from the mid-February record high, nearing the 20% sell-off that would trigger the technical definition of a bear market. Global stocks took a drubbing on Monday with China’s Shanghai Composite down -3.01%, Japan’s Nikkei index down -5.07%, and Europe’s Euro Stoxx 50 index down -8.45%.
The VIX S&P 500 Volatility Index on Monday soared to an 11-1/4 year high of 62.12 and closed the day up +12.52 at 54.46. The VIX so far remains well below the record high of 89.53 posted in November 2008 in the midst of the global financial crisis.
The currency markets were extraordinarily volatile on Monday. The dollar index plunged by -1.10% on expectations for the Fed to lead the way on cutting interest rates and possibly restarting a QE program. The sharp drop in the dollar’s interest rate differential situation outweighed any move by foreign investors to see the U.S. and the dollar as a safe haven.
USD/JPY on Monday plunged by -2.88% as the yen soared on expectations for heavy repatriation demand by Japanese investors as they dump overseas investments and bring money back home. EUR/USD rallied by +1.47% since the ECB has little room left to cut rates with its deposit rate already at a negative -0.50%, whereas the Fed has 100 bp of room left to cut to zero and 150 bp of room to match the ECB’s -0.50%.
Carnage engulfs the oil sector — April WTI crude oil on Monday plummeted to a 4-year nearest-futures low of $27.34 and closed the day down -$10.15 (-24.59%) at $31.13. WTI crude oil prices remained just above the 16-3/4 year low of $26.05 posted in March 2016, which was the last time that Saudi Arabia tried a price war.
Oil prices plunged as an oil war broke out between Saudi Arabia and Russia. Saudi Arabia on Saturday slashed its oil prices for April in an attempt to boost its market share and steal customers from Russia. Saudi Arabia indicated that it would raise production well above 10 million bpd in April from 9.7 million bpd in March and would raise production to record levels near 12.0 million if necessary. Russia’s Finance Ministry indicated its readiness for an oil siege by saying it has sufficient reserves to cover lost revenue “for six to ten years” with oil prices at $25 to $30 a barrel.
An extended Saudi-Russian oil war is likely to push many U.S. shale producers out of business since the debt of many of those companies is already trading at distressed levels. Oil company stocks plunged on Monday with the SPDR Energy Select ETF (XLE) falling to a new 15-year low and closing the day down -20.14%.
T-note yields plummet on recession expectations and oil price collapse — The 10-year T-note yield on Monday plunged to a new record low of 0.31% and closed the day -22 bp at 0.54%. T-note yields on Monday fell on (1) safe-haven demand, (2) expectations for a recession and aggressive Fed rate cuts, and (3) a plunge in inflation expectations. The 10-year breakeven inflation expectations rate on Monday plunged to an 11-year low and closed the day down -30 bp at 1.02%, which is half the Fed’s 2.0% inflation target.
The Dec 2020 federal funds futures contract on Monday fell by another -8 bp to 0.125%, discounting exactly 100 bp of easing by year-end from the current target mid-point of 1.125%. The market is fully discounting a 75 bp rate cut at next week’s FOMC meeting (March 17-18) and is discounting about a 70% chance of another -25 bp cut at the following meeting on April 28-29. That would leave the funds rate target back at the 0.00%-0.25% level seen during 2008-2015 in the aftermath of the global financial crisis.
Bank stocks took a drubbing on Monday as the markets worried about rising bad loans from a possible recession and about reduced bank profitability with short-term rates potentially turning negative and with a flat yield curve. The SPDR S&P Bank ETF (KBE) on Monday plunged to a 3-1/2 year low and closed the day down -14.72%, nearly double the -7.8% decline seen in the S&P 500 index.
The markets are also worried about bank risks and the stability of the financial system with the rout in stocks and the worries about a recession. The Fed on Monday announced that it will raise the size of its daily and term repos to boost liquidity in the banking system.
