Saudi Arabia is throwing a tantrum, and the fallout is unleashing some crisis-era deja vu on United States stock markets.
After the kingdom slashed what it charges for a barrel of oil in retaliation for Russia’s refusal to support a dramatic cut in crude production, oil prices cratered on Monday, dragging down stocks to their worst one-day performance since 2008 and further pummelling investor confidence, already bludgeoned by the widening coronavirus outbreak.
Fear of a looming credit crunch only served to further compound investor fears.
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After a brutal session, the Dow Jones Industrial Average closed down more than 2,000 points or 7.79 percent on Monday – its worst one-day showing since the market was in the throes of the global financial crisis over a decade ago.
The broader S&P 500 – a proxy for US retirement savings accounts and college savings plans – closed down 225.81 points or 7.6 percent. The Nasdaq Composite Index finished down 7.29 percent.
Trading was halted for 15 minutes at the start of the session on Wall Street after the S&P 500 cratered seven percent at the opening bell, triggering so-called circuit breakers designed to arrest sharp drops and allow cooler heads to prevail.
But calm was in a pitched battle with panic on Monday.
As investors fled stocks, they piled into US Treasuries – seen as a port in the storm during times of rising uncertainty. Prices soared, pushing the yield on the 10-year US Treasury – used as a benchmark for setting mortgage rates and interest charged on student loans – below 0.5 percent for the first time ever.
At one point, the 10-year yield was below 0.4 percent.
Investors were already nervous about the spreading coronavirus outbreak, which is raising the risk of recession around the globe as production slows and the demand for goods and services ebbs.
Factories have been idled, travel is restricted, conference and events are being cancelled, supply chains are disrupted, schools are closing and people who can work remotely are being urged to stay home.
“The shock posed by the coronavirus affects both the supply – and the demand-side of the economy,” Capital Economics group chief economist Neil Shearing noted this morning. “Large falls in the stock market also feed into weaker demand by reducing household wealth.”
A perfect storm
Into this maelstrom, Saudi Arabia has now unleashed an oil price war.
Global benchmark Brent crude fell more than 30 percent on Monday – the biggest drop since the 1991 Gulf War – before pairing losses to a 24 percent decline.
US benchmark West Texas Intermediate crude plummeted 24.59 percent to settle at $31.13 per barrel.
The crude crash was triggered by a price war caused by a breakdown on Friday of the alliance between the Saudi-led Organization of the Petroleum Exporting Countries (OPEC) and its most important ally, Russia.
After Russia refused to back a dramatic output cut that Saudi Arabia had reportedly been pushing for weeks, the kingdom struck back on Saturday by slashing its official selling price for crude. The kingdom is also planning to boost its output above 10 million barrels per day starting next month, Reuters News Agency reported, citing two sources.
Saudi Arabia has the lowest oil production costs in the world. By discounting prices and ramping up production, the kingdom is delivering a supply shock into a global oil market that is already reeling from a demand shock as coronavirus slows manufacturing, curbing appetites for crude.
The dynamic taking shape could deal a severe blow to US shale oil producers, threatening to drive some firms out of business.
President Donald Trump did not address the threat to the US shale oil industry on Monday. But he did highlight the silver lining for consumers while assigning blame for the stock market’s abysmal performance.
“Good for the consumer, gasoline prices coming down!” Trump tweeted.
“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!”
As nerves frayed, credit markets tightened, placing a strain on US banks and businesses. A crunch in credit markets makes it more difficult for corporations to get their hands on cash to fund day-to-day operations and refinance current debts.
The US central bank, the Federal Reserve, initiated measures to lubricate credit markets and keep them functioning smoothly, after the New York Fed said on Monday that it had boosted short-term lending operations it had previously planned to reduce.
Last week, the Fed turned to monetary policy to shore up flagging confidence with an emergency half a percentage point rate cut on Tuesday – the biggest since 2008.
On Monday, analysts at Goldman Sachs Group said they now expect the Fed to push interest rates back to the zero-bound range of 0.0 percent to 0.25 percent by the end of April – a level not seen since 2016.