Crude prices plunged 25% when OPEC and Russia failed to reach an agreement to curb production, partially because of the effect of the coronavirus on global economies, setting off a price war
Global equity markets were trading markedly lower Sunday evening following the crash in oil prices. The flight to quality accelerated as a result, with yields on Treasury securities plumbing previously unimaginable levels with all coupon maturities, including the 30-year bond, trading below 1% for the first time.
But the most severe damage may be yet to come when U.S. credit markets open Monday. Speculative-grade debt is likely to come under severe pressure from the prevalence of oil-related credits, which comprise over 10% of the sector.
Crude prices plunged 25% when OPEC and Russia failed to reach an agreement to curb production amid flagging demand, partially because of the effects on global economies from the coronavirus crisis, effectively setting off a price war.
S&P 500 futures on the CME fell the 5% daily limit at one point, a move typically associated with agricultural commodities such as pork bellies, not a contract on the main U.S. equity index. The deflationary spectre posed by the plunge in crude prices, with the benchmark U.S. price down $10.48, to $30.79 a barrel, hangs over the entire financial market. Oil producers, and the banks and other institutions that finance them, are vulnerable to the collapse in energy prices.
As stock trading opened in Asia, bourses such as China were reeling with losses of upward of 4%. Most Asian countries are big oil importers and otherwise would be expected to benefit from lower energy costs. But the hit to global economies from weaker oil revenues on top of the escalating coronavirus effects apparently are the greater fear.
Shortly before 10 p.m. ET, S&P 500 futures were down 137 points, or 4.62%, at 2827.00, while Dow Jones Industrial futures were down 1086 points, or 4.21%, at 24,703.00. The tech-heavy Nasdaq 100 futures were also down sharply, some 388 points, or 4.6%, at 8115.50. Early reads on futures on European bourses pointed to declines of 4%-5%, as the shutdown of the prosperous Northern Italian province of Lombardy also took its toll.
Tumbling oil prices once would have been considered a blessing for Americans with gas-guzzling SUVs and big McMansions. Indeed sharp upward spikes in crude oil preceded the past three recession, in 1991, 2001, and 2008, observes Marc Chandler, managing director for Bannockburn Global Forex. The emergence of the U.S. as a net oil and gas producer as the result of shale producers has changed market dynamics, he wrote to clients Sunday.
Chandler sees falling oil prices accelerating the consolidation in the industry, which could make the sector more resilient in the future. For now, however, energy producers, which comprise a major sector of the high-yield bond market, face another shakeout. Perhaps it will be less severe than the one from 2015 to 2016, when crude prices last crashed, but it isn’t apt to be pleasant.
The main refuge from risk continues to be the U.S. Treasury market, which is seeing utterly stunning moves. The 30-year long bond was quoted shortly before 10 p.m. ET at 0.975%, a record low, and down a massive 32 basis points from Friday’s close. At the short end of the yield curve, the two-year note traded at 0.39%, down 22 basis points, while the benchmark 10-year noted traded at 0.49%, down 27 basis points.
The other main shelter from the market maelstrom continues to be gold, which traded over $1,700 an ounce, up nearly $28, or 1.7%. In the currency markets, the Japanese yen benefited from safe-haven buying, surging to 101.91 to the dollar, 3.42 yen lower on the session, or 3.25%, an extraordinary move in the foreign exchange markets. The U.S. Dollar Index was quoted at 95.18, a decline of 0.80%.
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