• Joel

Stock Market BLOODSHED on Crude Oil Crunch, Coronavirus Combo

Stock markets have been absolutely crushed today on a double whammy of escalating Covid-19 concerns (its spread in Europe, the US and Middle East continues to accelerate) and huge oil market uncertainties.

The S&P 500 index is trading north of 6% lower on the day, as is the Dow Jones Industrial Average. The Nasdaq 100 is fairing slightly better as it does not contain energy stocks (it’s still north of 5% lower, however).

Covid-19 panic picks up

Cases in Europe are continuing to rise at an exponential rate; Italy - 7375 (+26%), Germany - 1040 (+24%), France - 1126 (+19%), Spain - 673 (+35%), Switzerland - 332 (+26%), UK - 273 (+31%), Sweden - 203 (+26%), Netherlands - 265 (+41%). The bracket is the increase in cases since Saturday.

Moreover, Italy implemented large scale quarantines in the north of the country, affecting some 16mln people. This is a good step in the right direction, and should help reduce the rate at which new people are being infected in the region.

Its just a shame that Italy did not do this two weeks ago, maybe hundreds of lives could have been saved. Hopefully the rest of Europe can take note and quickly implement similar measures, not that I am too hopeful here in the UK.

The UK Government earlier decided against implementing “social distancing measures”. With cases now at 319 in the UK and quickly rising, I imagine “social distancing” will be here sooner rather than later.

Saudis start oil price war

Crude oil prices are being absolutely crushed this morning, amid concerns that the Saudis are gearing up to start a price war to punish the Russian's for failing to agree to a deepening of production cuts at last week's OPEC+ meeting.

Over the weekend, sources alleged that the Saudi's will be upping production to above 10mln BPD in April, from current levels of 9.7mln BPD. The sources added that the Saudis told buyers that the Kingdown could increase output to as much as 12mln BPD, although this would be contingent on refiners' response to price cuts. In other words, the more buyers lap up these price cuts, the more Saudi supply is likely (this creates a further reasons why oil prices will struggle to rally - if demand shows signs of recovery, Saudi supply will quickly offset this).

Separately, the Saudis will give steep discounts to their customers in April; Aramco has cut the price of its Arab Light and Medium Crude by $6/bbl each for Asian customers and, in more of direct challenge to Russian crude suppliers, by as much as $8/bbl for European customers (Europe is a large importer of Russian crude).

In response to the prospect of a price war, WTI and Brent crude oil prices dropped by as much as 27% and 30% respectively, although both have since recovered off of worst levels to trade at roughly -20% on the day at the time of writing.

The sudden move lower in crude prices has prompted a rethink amongst Commodity research desks; Goldman Sachs now sees Brent crude averaging just $30/bbl in Q2 and Q3. ING slashed their Q2 forecast to $33/bbl from $56/bbl.

Overall market impact

Investors now have to not only contend with huge uncertainty regarding how bad the global economic disruption caused by Covid-19 will be, but also now huge uncertainty regarding the future of oil prices.

As noted above, oil prices have been crushed today. Oil generally has a positive correlation with global equities (normally equity price action drives crude oil prices) but this time, with the move in crude so large, the effect seems to have been reversed. I.e. oil is dragging equities lower with it today.

More directly though, energy stocks, who need oil prices to stay at a certain level are being hardest hit. Aramco shares fell north of 10%, and the hit to US shale stocks has been even harder.

In terms of how this affects other markets; lower crude prices implies lower inflation which boosts the value of bonds. Therefore bonds have received a double positive today; risk off flows (as they are a safe haven) and lower inflation expectations from lower crude prices.

In FX, there is a stark dividing line between havens and risk sensitive currencies and between oil exporting currencies and oil importers.

Implications for central banks

Finally, in terms of the implications for central banks, lower oil prices will act as another downwards drag on global inflation, which is already being dragged lower by softening demand due to Covid-19.

This is either a blessing or curse for central bankers, depending on how you see it.

Most major developed market central banks will now surely be unable to reach their inflation targets in the near term. But this grants them further room to pursue more aggressive monetary stimulus.

In other words, it is better that we are having to deal with a downside spike in oil prices than an upside one, as that would make it more difficult for central banks to ease.

Be wary. The extent of today’s stock market crash, coupled with frenzied market pricing in huge easing from the Fed this month, mean that another emergency rate cut from the Fed in the coming days is highly possible. Indeed, Fed Voter Bullard did hint that the Fed could cut rates outside of a normal meeting again if needed.


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