LONDON: Global stocks plunged on Monday and crude oil prices fell 33% after Saudi Arabia launched a price war with Russia, sending investors already concerned about the coronavirus fleeing for bond security and yen.
Saudi Arabia had amazed markets with the intention of increasing production significantly after the collapse of OPEC’s supply reduction agreement with Russia – a seizure of market shares reminiscent of a surge in 2014 which brought prices down by around two-thirds.
Brent crude and US crude futures slid down to US $ 14 to trade at US $ 31.02 and US $ 27.34 per barrel in chaotic trade before recovering some of their losses.
European stock markets suffered heavy losses, with London, Frankfurt and Paris falling from 6% to 7%. Italy’s main index fell 10% after the government ordered the foreclosure of large parts of the north of the country, including the financial capital Milan.
The pan-regional STOXX 600 fell into bear market territory – a drop of more than 20% from its February peak. Oil stocks fell, Premier Oil down 54% and the energy giant BP trading almost 20%.
Massive sales were set to continue on Wall Street, with US futures contracts reaching their bearish limit.
“We are seeing this week, finally, a large-scale liquidation and signs of capitulation, large-scale panic – we are seeing it in every asset,” said Paul O’Connor, head of multi-asset at Janus Henderson.
“Falling oil prices add huge disruptive momentum to markets that are already very fragile – investors are looking for losers in this move.”
The losses in Europe followed sharp declines in Asia. The largest MSCI Asia-Pacific equity index outside Japan lost 4.4% on its worst day since August 2015, and the Japanese Nikkei fell 5.1%. The Australian commodities market fell 7.3%, its largest daily decline since the global financial crisis of 2008.
Investors crowded into safe haven bonds, driving 30-year US bond yields below 1 percent on bets that the Federal Reserve will be forced to cut interest rates by at least 75 basis points when it March 18 meeting, after already delivering an easing emergency last week.
The 10-year US Treasury yield fell to as low as 0.318% during its largest daily decline since 2011 – during a sovereign debt crisis in the eurozone.
The number of people infected with the coronavirus has risen above 110,000, and 3,800 have died from the virus.
There was growing concern that American oil producers who had issued large debts would be made unprofitable by falling prices.
The mood was also affected by North Korea’s firing of three projectiles off its eastern coast.
Noting that many central banks had little room for maneuver, Martin Whetton, head of bond and rate strategy at CBA, said: “Hopefully we will start to see the reaction more clearly.”
Markets fully evaluated the price in a 75 basis point easing from the Fed on March 18, while a near-zero drop was now considered likely in April.
The European Central Bank will meet on Thursday and be under intense pressure to act, but rates are already deeply negative.
“The ECB meeting this week will be the first test case for the President of the ECB, Christine Lagarde,” ING euro zone chief economist Carsten Brzeski said in a statement. “With almost more ammunition and facing an external shock that cannot be tamed by economic policies, the ECB will have to carefully balance words and deeds.”
The 10-year Bund rate – the first secure asset in the eurozone – fell to a new record of -0.863% while inflation expectations for the eurozone fell below 1% for the first time.
The data suggests that the global economy went into recession this quarter. Figures from China over the weekend showed that exports fell 17.2% in January-February compared to the previous year.
Falling US yields and Fed rate expectations pushed the dollar to its biggest weekly loss in four years before it gained ground. .
The dollar extended its slide to 101.58 yen, depths not seen since late 2016. It was down almost 3% to 102.42.
The euro reached its highest level in over 13 months at US $ 1.1492, to be the last at US $ 1.1410.
Gold initially cleared US $ 1,700 an ounce to hit a new seven-year high, falling to US $ 1,677.4 amid discussions that some investors had to sell to raise funds to cover margin calls in actions.
(Additional reporting by Sujata Rao in London, Wayne Cole in Sydney and Sumeet Chatterjee in Hong Kong, edited by Catherine Evans and Timothy Heritage)