The stock market started deep in negative yesterday, as the futures markets headed lower after coronavirus fears increased over the weekend and an oil pricing dispute intensified between OPEC leaders and Russia, which caused crude prices to fall more than 20%, to the low $30 level.
At the start of trading day on these shores, the major market averages were down 7% within the first few minutes. This opening was the third worst on record, only topped by the trading session following the 9/11 terrorist attacks and the 2008 financial crisis. The initial move lower triggered circuit breakers, causing trading to pause for 15 minutes during the first hour of the session. After the market resumed trading, the indexes had a brief rally before the feverish selling picked up again, with Dow Jones Industrial Average off over 2,000 points, marking the largest one-day point drop for the index of 30-bellwether companies. The S&P 500 Index and NASDAQ Composite moved lockstep with the Dow 30.
The move was broad based, with all of the indexes bleeding red ink. The energy sector was down by around 20%, walloped by the aforementioned significant fall in the price of oil, which will likely dampen earnings expectations for the coming months. The longer that oil prices stay lower, the more it will hurt related earnings results. Meantime, utility and consumer staples stocks were the best performers yesterday, though only on a relative basis. Earnings at companies in these sectors are least likely to be affected by a slowdown in the global economy.
As noted, the oil-price retreat was directly traced to the inability of the world’s major petroleum producers—most notably the OPEC countries and Russia—to agree to on a production cut over the weekend, despite weaker demand associated with the coronavirus. Saudi Arabia responded by stating it would offer a massive discount to its trade partners, cutting prices between $6 and $8 per barrel. This offer caused oil prices to fall considerably, which is not good for the oil producers, especially the weaker shale production entities.
Meantime, the move lower was accompanied by a substantial drop in U.S. Treasury Bond yields, which hit new lows. The 10-year Treasury note and the entire yield curve was below 1% for the first time. Traders are speculating that the Federal Reserve will be forced to reduce interest rates by as much as 75 basis points at its next meeting, which commences next week. Overall, these low-interest rates suggest that the recent 50-basis-point easing by the central bank did little to assuage traders’ fears.
Market volatility has reached a high not seen since the height of the financial crisis in early 2009. Indeed, the CBOE Volatility Index (or VIX) eclipsed 60 at one point yesterday before falling back to the mid-50s level by the closing bell. This suggests traders are far more willing to pay for options protection than they were a few weeks ago, given the substantially higher prices associated.
Before the bell, the equity futures were pointing to a relief rally on Wall Street, with the Dow 30 and S&P 500 futures up more than 800 and 100 points, respectively. Overnight, the main indexes in Asia rallied some, while the major European bourses have recovered more than 2%, as trading moves into the second half of the session on the Continent. – John E. Seibert III