Global stocks tumbled in chaotic trading and investors sought refuge in US government bonds after a crash in the price of oil rocked financial markets already reeling from the spiralling impact of coronavirus.
Wall Street’s S&P 500 plunged 7 per cent shortly after the opening bell, triggering a so-called circuit breaker meant to curb panicky selling. After the 15-minute halt was lifted, they rebounded slightly but remained more than 6 per cent down.
The sharp fall followed similar moves in Europe: the continent-wide Stoxx 600 tumbled 6 per cent, and London’s FTSE 100 was down by a similar margin. MSCI’s Asia Pacific stock gauge dropped 4 per cent.
The triggering of the circuit breaker in New York was “an exclamation point on how bad things are,” said Mike Kagan, a portfolio manager for ClearBridge Investments, who added that it had given traders a “chance to catch their breath”.
Government bonds rallied as investors piled into the relative safety of sovereign debt and braced for more support from central banks, igniting the sharpest rally for US 10-year Treasuries in more than a decade.
The 10-year US Treasury bond yield tumbled to a record low of 0.318 per cent before rebounding to 0.528 per cent. The 30-year US Treasury yield dropped below 1 per cent, taking the entire US yield curve below that level for the first time.
The gyrations across markets followed Saudi Arabia’s weekend decision to launch an oil price war, which sent the price of crude falling as much as 30 per cent as the kingdom threatens to swamp supplies. The drop — the biggest since the Gulf war in 1991 — exacerbated two weeks of intense market turmoil caused by escalating concerns over the economic impact of the coronavirus.
“In just over two weeks, investor sentiment has swung from complacency to panic,” said Paul O’Connor, a portfolio manager at Janus Henderson Investors. “What started as a virus-driven de-risking has now mutated into a broad-based, multi-asset capitulation,” he said.
US president Donald Trump weighed in on Twitter. “Saudi Arabia and Russia are arguing over the price and flow of oil. That, and the Fake News, is the reason for the market drop!” he wrote, adding: “Good for the consumer, gasoline prices coming down!”
Italy’s FTSE MIB was hit especially hard, shedding more than a tenth of its value after 16m people in the country’s prosperous north were locked down in an effort to control the country’s virus outbreak. The Stoxx Europe 600 slid into bear market territory — meaning a fall of a fifth since a recent high.
Jim Reid, a strategist at Deutsche Bank, said the plunge in oil had led to a “complete capitulation” across other asset classes.
“No one has an information advantage when it comes to coronavirus. As a result, the path that investors are taking is to take risk off the table, regroup and re-evaluate when more clarity becomes available,” added Michael Arone, chief investment strategist for State Street Global Advisors.
Trading activity was aggressive with more than 5bn shares of major European companies trading hands by 2pm in London — more than three times the average over the past half-year, according to Bloomberg data. Volume on the New York Stock Exchange was running around 2 times above average.
Major energy groups came under acute pressure. US oil majors ExxonMobil and Chevron dropped around 10 per cent, while the UK’s BP tumbled by a fifth.
Big lenders in the US and Europe faced intense selling as investors worried about the impact of tumbling interest rates on profitability. JPMorgan Chase, Bank of America and Citigroup dropped 10 per cent, with Société Générale, Deutsche Bank and UniCredit declining by even greater margins.
Investors now face the prospect of the 10-year yield — which stood at 1.5 per cent just 18 days ago — soon joining government bonds in Europe and Japan in negative territory.
Interest rate futures now suggest the Federal Reserve will this summer cut its main interest rate back to the historic lows set during the 2008-09 financial crisis of 0 to 0.25 per cent. The Fed last week slashed rates by half a percentage point — the biggest cut since the crisis — to a range of 1 to 1.25 per cent.
Goldman Sachs chief US economist Jan Hatzius said on Monday he now expects the Fed to reduce rates by half a percentage point both in March and April.
The New York Fed, which handles the central bank’s market operations, also said on Monday it would increase the size of daily repo operations by $50bn to $150bn as it sought to ease conditions in the American money markets.
Joachim Fels, global economic adviser at US asset manager Pimco, said a recession in the US and the eurozone in the first half of the year was now “a distinct possibility” and that Japan was “very likely” already in one.
Traders ditched two major US exchange-traded funds that track the debt of lowly-rated companies. The BlackRock HYG fund and State Street JNK fund both tumbled around 5 per cent, underlining growing investor angst over the US junk bond market.
Haven currencies rallied, while currencies of oil-exposed countries came under heavy pressure. Japan’s benchmark Topix closed down 5.6 per cent, meeting the technical definition of a bear market. The yen, seen as a haven during times of market uncertainty, strengthened as much as 3.6 per cent against the dollar to ¥101.57.
Sydney’s S&P/ASX 200 fell 7.3 per cent, marking its worst one-day fall since the global financial crisis. The Australian dollar experienced a “flash crash”, plunging almost 5 per cent against the US dollar in just 20 minutes to briefly touch its lowest level since the global financial crisis in 2008. Traders blamed algorithmic trading platforms affecting market liquidity.
