Dow Nosedives on Virus Woes and Oil Wars

What’s happening: US stocks plummeted on Monday, with the Dow posting its biggest single-day point decline in history, following a slump in oil prices due to the Saudi-Russia price war and worries of the spreading coronavirus.

What happened: The plunge in oil prices sparked the sell-off in markets, triggering a circuit breaker shortly after the opening bell. Trading in the market was halted for 15 minutes due to the shocking pace of the downturn. Dow had dropped more than 1,000 points for the fifth time during Donald Trump’s presidency.

Why it matters: Investors moved to safer assets, following heightened fears of coronavirus disrupting global supply chains and propelling the US economy into a recession. The yield on the 10-year Treasury note fell below the 0.5% mark for the first time ever and was down to 0.318% at one point during early trading on Monday. The Dow lost a whopping 2,013 points to close at 23,851, while the S&P 500 shed 7.6% to 2,746. The Nasdaq 100 plunged 7.29% to settle at 7,950. 

Most of the decline was triggered by Saudi Arabia’s unexpected move to cut its official crude selling prices for April, despite earlier attempts to support the crude market. The move was a result of OPEC talks collapsing on Friday, with Russia resisting the production cut. Crude oil suffered its worst day since the 1991 Gulf War following Saudi’s decision.

Markets are expecting another rate cut by the Federal Reserve at its meeting later this month. The New York Federal Reserve also announced plans to raise the amount of money offered to banks for meeting their short-term funding requirements. Banking stocks tumbled again amid concerns of the oil crash resulting in defaults among energy companies. Shares of Citigroup, JPMorgan and Bank of America tumbled more than 13% each.

The coronavirus situation outside China is worsening. In the US, New York, California and Oregon have declared a “state of emergency,” with the country reporting over 700 cases and 27 deaths so far. Italy has expanded quarantine restrictions to all 60 million of its citizens as the country recorded the highest number of coronavirus cases after China. Italy has confirmed over 9,100 infection cases with 463 deaths. Although the situation in China seems to be getting under control, with the country reporting only 19 cases today, this didn’t do much to improve investor sentiment.

Gold, one of the world’s favourite safe-haven assets, reached its highest level since December 2012, rising over $1,700 an ounce on Monday.

Crude oil settled around 25% lower, after dropping more than 30% at one point of time. WTI crude recovered slightly today, with the oil futures rising 6.6% to $33.19 per barrel.

What to watch: The market is eagerly awaiting positive news related to coronavirus being controlled. The economic calendar is light today, with the US scheduled to release the NFIB business optimism index and Redbook index, which may not do much to provide relief to investors. The NFIB business optimism index is expected to fall to 103.7 points in February, versus a reading of 104.3 in January.

WTI crude oil is likely to be in focus today, with oil futures suffering their highest single-day percentage decline since the Gulf War in 1991​​.

Context: Crude oil plummeted to a four-year low as Saudi Arabia geared up for a price war with Russia. Saudi Arabia has announced a reduction in its oil selling price for April delivery, at a time when demand is already under severe pressure following the global spread of coronavirus.

Details: Saudi Arabia and Russia both announced plans to increase crude production after the OPEC+ (Organization of the Petroleum Exporting Countries and its allies) deal to limit supply got derailed on Friday. Moscow refused to provide support to the OPEC for a deeper production cut. Other countries in the OPEC+ group are also expected to follow suit soon and increase supply, putting additional pressure on oil prices.

More than 114,000 coronavirus cases have been reported worldwide, with over 4,000 deaths so far. This has the potential to result in a massive slowdown in global economic growth. The virus outbreak in China has already reduced demand for oil, as the Asian nation is the world’s largest buyer of the commodity.

WTI crude for April delivery fell 24.6% to settle at $31.13 per barrel on the New York Mercantile Exchange, after falling around 33% at one point earlier in the session. Brent crude futures also tumbled 24.1% to close at $34.36 per barrel.

Energy stocks fell sharply, with Exxon’s shares down more than 12%. Shares of Chevron plunged more than 15%, suffering their biggest decline since the October 1987 market crash.

Why it matters: Following the beginning of a price war between Russia and Saudi Arabia, Goldman Sachs lowered its Brent forecast for the second and third quarters to $30 per barrel and said prices could fall to the $20s range. Standard Chartered also cut its oil price estimates for 2020 and 2021, and now expects WTI crude prices to average $32 per barrel in 2020, down substantially from their earlier projection of $59 per barrel. The bank projects crude prices to average $41 per barrel next year.

What to watch: Investors will be keeping a close eye on further supply-related announcements from Saudi Arabia, Russia and other group countries. The market also awaits the API (American Petroleum Institute) supply report scheduled to be released later in the day as well as the EIA (Energy Information Administration) supply report tomorrow.

Other Market: Most European indices were trading higher on Monday, with the FTSE 100, German 30 and French 40 up 2.45%, 2.52% and 2.70%, respectively, at 9:10am GMT today.

Brazil's industrial production and the US 3-year note auction.