MARKETWATCH: How an ‘oil shock’ and coronavirus combined to spark a global stock-market selloff

Published: Mar. 9, 2020 at 12:01 PM CDT
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Oil prices plunged Monday as Saudi Arabia and Russia prepared for a global price war, triggering a world-wide equity rout that saw the Dow Jones Industrial Average drop more than 2,000 points and triggered a temporary trading halt on U.S. exchanges as shock waves traveled through financial markets already shaken by the spread of the coronavirus.

While falling crude prices, which mean lower gasoline prices for consumers, sound like they could be a balm during a period of economic stress, analysts and investors said the combination of sharply declining oil prices combined with existing fears over the economic implications of the coronavirus only heightened uncertainty and fear.

“The coronavirus presents investors with an unprecedented global problem. Investors are uncertain about the nature of the virus, its potential economic impact and the policy response. The oil shock has only added to this confusion and uncertainty,” said Paul O’Connor, head of the multiasset team at Janus Henderson Investors, in a note.

“One thing we do know, however, is that markets are now in panic mode,” he said.

What happened to oil?

Oil futures fell more than 30% in early action late Sunday and the U.S. benchmark, April West Texas Intermediate crude US:CLJ20 remained down 17.5% at $34.08 a barrel and May Brent UK:BRNK20, the global benchmark, was off 19% at $36.64 a barrel. Both grades traded at their lowest levels since early 2016 and remained on track for their biggest one-day drops since the 1991 Gulf War.

Why is falling oil a problem for stocks?

U.S. stocks plunged at the opening bell with trading briefly halted as a 7% intraday slide for the S&P US:SPX triggered a so-called circuit breaker. Stocks remained sharply lower, with the Dow Jones Industrial Average US:DJIA down around 1,300 points, or 5.1%, after dropping more than 2,000 points at its session low. The S&P 500 was off 5%.

Oil accounts for more than 3% of the S&P 500, and banks are also exposed to the sector via loans. Meanwhile, pressure on yields tied to the collapse in oil prices is also bad news for financial stocks, analysts said.

The breakdown in oil prices also adds to fears of a global recession. And, with the U.S. now a net exporter and the world’s largest oil producer, falls in price, while offering some benefit to consumers, aren’t an unalloyed positive and may even be a net drag, economists have argued.


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