We knew this could get really ugly. Now it has.
United States stock markets nosedived on Monday, triggering circuit breakers to halt trading as the double-punch of crashing oil prices and the worsening global coronavirus outbreak pummelled investor confidence to the point of panic.
Fears of a looming credit crunch further compounded the sense of doom.
The Dow Jones Industrial Average tanked 1,700 points at the open of trading on Wall Street, and lost more than 2,000 points before recovering slightly.
The broader S&P 500 stock index – a proxy for US retirement accounts and college savings plans – cratered seven percent at the open, triggering so-called “circuit breakers” to halt trading for 15 minutes to prevent a further rout.
Investors fled stocks and piled into the safety of US Treasuries, driving prices up and yields down to record lows. The yield on the 10-year US Treasury – used as a benchmark for setting interest rates on mortgages, student loans and other financial products – fell below 0.5 percent. The longer-maturing 30-year US Treasury yield fell below one percent.
Global benchmark Brent crude fell more than 30 percent on Monday – the biggest drop since the 1991 Gulf War. After pairing some of those losses, it was still down around 20 percent.
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 retaliated 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 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 and gums up supply chains, curbing appetites for crude.
The double shock could deal a severe blow to higher cost production US shale oil, threatening to drive some firms out of business.
US President Donald Trump did not address the threat to US shale producers on Monday, focusing instead on the silver lining for consumers in the form of lower petrol prices.
“Good for the consumer, gasoline prices coming down!” Trump tweeted on Monday.
The timing of the Saudis’ oil-price war could not have come at a worse time for business and investor confidence that was already reeling from global recession fears triggered by the coronavirus outbreak.
As panic threatens to take hold, credit markets are tightening fast, 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 would increase 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 the 2008 financial crisis.
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.