Russia punched investors in the face as it refused to follow OPEC with further production curbs to match the slump in oil demand caused by the coronavirus breakout at last week’s Vienna summit.
Oil crashed more than 30% on Monday open, the most since 1991. WTI crude collapsed below $30 a barrel on huge investor deception. Brent fell to $31.
Equity markets kicked off the week with a colossal sell-off, as well. Nikkei fell past 6%, CSI 300 and Hang Seng smashed 3.25% and 3.75% respectively, as the ASX 200 dived 7.33% on tumbling oil prices.
US equity futures as much as the daily limit of 5%, triggering trading curbs.
European indices are poised for a chaotic open. Trading on futures hint that the oil-heavy FTSE 100 could slip below the 6000 mark at the open. Energy stocks will certainly be badly battered by the heavy slump in oil prices.
The US 10-year yield crashed below 0.50% and the entire US yield curve ranging from 3-month to 30-year collapsed below 1% for the first time in history.
The EURUSD jumped to 1.1485 on hefty US dollar unwind. Cable recovered above the 1.30 mark.
The yen and the Swiss franc rallied on heavy capital rush to safety. The USDJPY tanked below 103 for the first time since October 2016. The USDCHF shortly traded below the 0.92 mark.
Rise in gold remained contained below the $1700 per oz, however, on fear that the negative correlation between gold and equities could break again and leave investors unprotected in such tumultuous market conditions.
The Federal Reserve (Fed) expectations went ballistic. Activity on US sovereigns now suggests 70% probability for a 75-basis-point cut at next week’s policy meeting, and 30% probability for a 100-basis-point cut. And we are not even sure that a sizeable Fed action has the means to calm the markets, given that investors have already let the Fed know that low rates is not the source of the problem, but supply chain disruptions are. But the Fed has its hands tied. A 50-basis-point cut is the minimum we expect at next week’s FOMC meeting.
It is certain that at this point, there starts being a serious disconnect between the potential of coronavirus shock on the economies and market pricing. There may even be a disconnect between the measures taken to contain the virus and the severity of health implications caused by it. It is sane to keep in mind that though the Covid-19 is a highly contagious virus, significantly more lives are lost due to a typical seasonal flu each and every year.
Economic data in the US so far shows that the coronavirus fears have not been materialized as badly as priced in. Solid jobs report released in the US on Friday showed that the US economy added 273’000 nonfarm jobs in February, almost 100’000 more than expected. The numbers suggest that the US economy remains at a ‘good position’ and should be capable of withstanding the coronavirus shock to the economy. Hence, the actual sell-off is a mix of speculation and amplified panic that has been triggered by the coronavirus, but merely reflects the true extent of the outbreak.
Now we clearly see that speculation is a dangerous game. And because it doesn’t necessarily rely on the facts, it is difficult to foresee how far it could drag the markets.
We believe that once the OPEC shock is left behind, it will gently be time to consider a justified upside correction to the current bear market. Though, a readjustment of central bank expectations may dent the recovery in the medium term.