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Black Monday: FTSE tumbles 8 per cent, Oil crashes 30 per cent, E-mini S&P limit down

Oil slick sends markets into freefall
March 9, 2020

This will be remembered as Black Monday. If you thought it couldn’t get any worse than the last fortnight, think again. The blood really is running in the streets, it’s utter carnage out there.

  • Oil plunges 30 per cent, biggest fall ever
  • E-mini S&P sinks 5 per cent, limit down, halts trading
  • FTSE 100 tumbles 8 per cent in bear market, BP slumps 25 per cent
  • US 30 year Treasury yield under 1 per cent for first time, 10s hit 0.32 per cent

They don’t do limit down in oil…Oil prices collapsed 30 per cent after Saudi Arabia launched a price war with offers of steep discounts to their crude exports in the wake of OPEC+ failing to agree to cutting output. I make that the biggest daily fall ever, and the first 20 per cent fall since the Gulf War. WTI crude futures suffering losses of more than 31 per cent to trade below $28 and Brent crude plunged to trade under $32, but we have seen both turn a tad higher this morning.

It looks as though the OPEC+ alliance that has underpinned pricing in crude markets for over 3 years has completely collapsed, with members free to pump as much as they like from April. Saudi Arabia maybe hoped to bully Russia by shocking prices lower like this, but for sure Russia will be happy to watch US shale suffer. Putin is not one to back down, but he may have to. At present we see no way back for OPEC+, but the severity of the drop in crude after months of weakness could force the erstwhile allies back to the table.

 

Coupled with the demand destruction and uncertainty over future oil demand growth caused by the coronavirus, a collapse of the cartel’s ability to control supply is ultra-bearish for crude. There is no reason to bid up prices. It’ll take a long time to get back from these levels – this is not a gap that will close easily.The major threat for wider markets is credit risk as US shale companies are facing a wall of debt maturities in the coming quarters. The US shale industry will suffer the worst destruction from this collapse. Moody’s only warned in Feb about a ‘staggering’ $86bn in debt maturities coming due over the next two years that left the US shale market exposed to a high level of bankruptcy risk. US high yield debt markets are going to get utterly trashed today.

Equities have been caught in the blast from the oil bomb. There’s a risk of losses in oil positions needing to be covered by selling down elsewhere - we’re in a viscous circle. Equity markets are hideous today and these kind of moves are to be afraid of as they can lead to aggressive tightening in credit that can spiral into real financial distress. We don’t know even know what kind of impact the coronavirus will have on the economy yet bond and equity markets are screaming recession. This is going to take a massive fiscal effort - slicing rates by 50bps ain’t going to cut it.European equities tumbled amid the carnage on Monday morning – it took a long time for shares to open as the uncrossing took a little longer than usual due to the volatility. The FTSE 100 is taking an absolute pasting, sinking 8 per cent to trade under 5,900, hitting its lowest level since the immediate aftermath of the Brexit referendum. It’s made worse by the oil majors which make up such a portion of the index. Shell tumbled 20 per cent, with BP falling 25 per cent to under £3. BP was trading at this level in 1996.

The last time we had an oil shock like this in 2014 the majors cut costs aggressively and divested assets. There will be serious damage done this time, and it will last. You’ve got to seriously question whether BP and Shell will be able maintain dividends when crude is trading at $30. Airlines are hideous too – IAG slipped 9 per cent . Many of these companies are now sitting on big losses from hedging oil at higher prices but they could well benefit down the line if they can lock in these prices. US stock futures tumbled 5 per cent, with the S&P 500 hitting limit down to halt trading at 2821, under the key 2855 support and where the August 2019 horizontal support rests. 2730 is in sight. The Vix remains elevated above 40 and its Z score has only ever been higher once before, in July 2007.

The oil price shock has totally unnerved investors, while Italy’s decision to quarantine 16m citizens in the north of the country has left markets feeling like the coronavirus outbreak is out of control - where next? The U.K. is preparing for the worst.US 30-year Treasury yields fell under 1 per cent for the first time. 10s fell to fresh record lows under 0.5 per cent, hitting 0.32 per cent at one point overnight. These could be going negative before king and there’s nothing the Fed can do about it. These moves in bonds are so swift equity markets are struggling to keep pace.

In FX, the US dollar declined as yields dropped, producing yet narrow interest rate differentials with other majors. The ECB and BoJ can’t go much lower so EUR and JPY are rallying hard with the carry unwind. Euro net short positioning had also been looking very over extended. EURUSD pinged to 1.15 to trade at its highest in a year. USDJPY dropped to lows at 101, GBPUSD pushed up towards 1.32.

Neil Wilson is chief markets analyst at Markets.com