The Market Today
Virus Grows and Oil Collapses Sending Markets Reeling
by Craig Dismuke, Dudley Carter
Coronavirus Update: The coronavirus continued its exponential rate of spread over the weekend. Total cases globally new exceed 110,000 and total deaths reported are approaching 4,000. The virus has now spread to 109 countries (according to Johns Hopkins CSSE data). In the U.S., the case-count has now reached 564 covering at least 32 states. The Italian government locked down most of the northern part of the country, where a quarter of its citizens reside and an import area for economic growth. Conferences continue to be canceled in the U.S. and travel plans altered. Along with a plunge in the price of oil over the weekend (more below), the economy now appears headed for a recession. How deep and how long that recession proves to be will likely be determined by the duration of the virus outbreak and the efficacy of the presumed stimulus measures.
There are no reports on today’s economic calendar.
Markets in Turmoil as Oil Price War Begins: Monday’s global market open was pure mayhem after Saudi Arabia launched the opening salvo in what could become an all-out price war between global crude producers. Saudi Arabia said last Thursday that OPEC had agreed to cut production to prop up prices dented by weaker demand dynamics caused by COVID-19, but wanted Russia to agree to the deal before it could move forward. Russia, however, chose to walk away from the deal with its energy minister saying Russia would pump as much crude as it would like. Over the weekend Saudi Arabia cut its price for global crude exports and signaled it would increase production, two separate acts that analysts said were shots across the bow that could spark a price war.
Oil Prices Collapse in Historic Monday Price Action: Investors responded sharply as crude prices opened Monday in Asia with a historic collapse of more than 30%, the second-largest decline on record. Brent dropped as low as $31.02 per barrel after closing Friday at $45.27. U.S. WTI plunged as low as $27.34 per barrel after finishing Friday at $41.28. Both crude types have trimmed their losses but remain down more than 20% ahead of U.S. trading. The tumultuous turn in oil markets has sparked a nasty chain of events that rippled through global equities and sent Treasury yields spiraling in nearly unbelievable fashion. With global investors already reeling from worries the spread of COVID-19 could on its own tip the global economy into a recession, U.S. equity futures were halted for trading after falling 5% amid the oil plunge. The MSCI Asia Pacific index fell 4.2% and several national indices dropped even more severely. Europe’s Stoxx 600 sank 6.5% and into a bear market, down more than 20% from its February 19 record close.
Treasury Yields Plunge as Investors Seek Protection: Incredible price action in the Treasury market sent the 10-year yield tumbling as many as 45 bps overnight to as low as 0.3137%. The Long Bond fell even more, dropping as many as 59 bps to as low as 0.70% at one point. The moves led a flattening of the curve and futures to price in a swift and sharp response from the Fed. The 2-year yield fell 24 bps to 0.26% as futures priced in a 75-bp cut in March and a return to the zero lower bound as soon as May. Already this morning, the Fed has announced it will increase the size of its open market operations in an attempt to ensure sufficient liquidity. The overnight limit was raised from $100B to $150B and the 14-day term operations were increased from $20B to $45B.
ICYMI – March 6, 2020 Weekly Market Recap: The Fed surprised markets last week by cutting its target rate range by 50 bps to 1.00% to 1.25% in its first intermeeting emergency cut since the 2008 financial crisis. The new coronavirus, COVID-19, continued to spread to more countries around the globe and into an increasing number of states in the U.S. The Fed cited the “evolving [virus] risks” in its statement that also pledged that the Fed will continue to “monitor developments” and “use its tools and act as appropriate to support the economy.” The Fed’s decision came amid a flurry of other developments related to the virus, and global virus response, that whipsawed global equities throughout the week and sent longer Treasury yields to new historic lows. Stocks completed their second-most volatile two-week span since the financial crisis and the 2-year yield extend its run of consecutive daily declines to twelve, the longest ever recorded. The 7-, 10-, and 30-year yields finished the week at new all-time record lows. Click here to view the full recap.