Black Monday: Why global stocks and oil prices plunged

The combination of the Russia vs. Saudi Arabia oil price war and a crash in equities triggered by coronavirus economic concerns led to what analysts are calling a "Black Monday." Investors expect the European Central Bank  to announce new stimulus measures.

First Look

Global stock markets and oil prices plunged Monday after a fight among major crude-producing nations jolted investors who already were on edge about the surging costs of a virus outbreak.

The main stock indexes in Britain and Germany were down by almost 7%. Japan's benchmark closed down 5.1% while Australia's lost 7.3% and the Shanghai market in China was off 3%.

Monday's losses, including a 7.8% tumble in the Dow Jones Industrial Average, raised fears that a recession might be on the way in the U.S. and that the record-breaking 11-year bull market on Wall Street may be coming to an abrupt end in a way no one even imagined just a few months ago. 

Bond yields hit new lows as investors bought them up as financial havens.

The benchmark U.S. crude price was down more than 20% to their lowest levels since 2016. They were down as much as 30% earlier, deepening a rout that began when Saudi Arabia, Russia, and other major producers failed to agree on cutting output to prop up prices. A breakdown in their cooperation suggested they will ramp up output just as demand is sliding.

The disintegration of  OPEC+, made up of the Organization of the Petroleum Exporting Countries plus Russia and other several oil producers, ends more than three years of cooperation to support the market.

Saudi Arabia plans to boost its crude output above 10 million barrels per day (bpd) in April after the current deal to curb production expires at the end of March, two sources told Reuters on Sunday.

Analysts were divided over how long this brinksmanship between Russia and Saudi Arabia could last.

"The timing of this lower price environment should be limited to a few months unless this whole virus impact on global market and consumer confidence triggers the next recession,"  Keith Barnett, senior vice president for strategic analysis at ARM Energy in Houston told Reuters.

Investors usually welcome lower energy costs for businesses and consumers. But it can also hurt producers, such as oil companies.

The last time crude prices fell this low, in 2015, the U.S. saw a raft of bankruptcies by smaller energy companies.

The abrupt plunge in markets Monday reflected the anxieties of traders. "A blend of shocks have sent the markets into a frenzy on what may only be described as 'Black Monday,'" said Sebastien Clements, analyst at financial payments platform OFX. "A combination of a Russia vs. Saudi Arabia oil price war, a crash in equities, and escalations in coronavirus woes have created a killer cocktail to worsen last week's hangover."

In Saudi Arabia, the Riyadh stock exchange suspended trading of state-owned oil giant Saudi Aramco after its share price sank by the daily 10% limit at the opening.

Investors already were on edge about the mounting costs of the coronavirus outbreak that began in China and has disrupted world travel and trade.

Anxiety rose after Italy announced it was isolating cities and towns with some 16 million people, or more than one quarter of its population, in its industrial and financial heartland. Later Monday, Italy extended the lockdown to the entire country. 

In Europe, London's FTSE 100 tumbled 6.5% to 6,039 after opening down by more than 8%. Frankfurt's DAX shed 6.2% to 10,825 and the CAC 40 in France lost 6.7% to 4,797. Italy's FTSE MIB plunged 9.8% to 18,755.

On Wall Street, trading in futures for the Dow Jones Industrial Average and the S&P 500 was frozen after both fell by more than 5%, a daily limit. The last time they were frozen was just after U.S. President Donald Trump was elected in 2016.

Companies have been hit by travel and other controls that are spreading worldwide as the global number of coronavirus infections rose past 110,000 globally.

Tokyo's Nikkei 225 fell to 19,698.76 Monday after the government reported the economy contracted 7% in the October-December quarter, worse than the original estimate of a 6.3% decline. That was before the viral outbreak slammed tourism and travel but after a sales tax hike dented consumers' appetite for spending.

Hong Kong's Hang Seng sank 4.2% to 25,047.42. The Shanghai Composite Index declined to 2,943.29.

The S&P-ASX 200 in Sydney retreated to 5,760.60 Monday. The Kospi in Seoul lost 4.2% to 1,954.77.

India's Sensex retreated 6.2% to 35,255.73. Markets in Taiwan, New Zealand, and Southeast Asia also declined.

Benchmark U.S. crude fell 21.9%, or $9.03, to $32.25 per barrel in electronic trading on the New York Mercantile Exchange. Brent crude, the international standard, lost 20.7%, or $9.32, to $35.95 per barrel in London.

The International Energy Agency said in a report Monday that oil demand could fall this year for the first time since the global financial crisis in 2009.

"The oil price will stay low" in the $30s per barrel, IEA chief Fatih Birol said.

The dollar sank to 102.41 yen from Friday's 105.29 yen. Investors in Asia often buy up the Japanese currency and bonds in times of volatility. The euro advanced to $1.1408 from $1.1289.

Chinese factories that make the world's smartphones, toys, and other consumer goods are gradually reopening but aren't expected to return to normal production until at least April. That weighs on demand for imports of components and raw materials from China's Asian neighbors.

Apple Inc. says slowdowns in manufacturing iPhones in China will hurt its sales totals. An airline industry group says carriers could lose as much as $113 billion in potential ticket sales.

Adding to pessimism, China reported Saturday that its exports fell 17% and imports were off 4% from a year earlier in January and February after Beijing shut factories, offices, and shops in the most severe anti-disease measures ever imposed.

Central banks worldwide have cut interest rates. But economists warn that while that might help to encourage consumer and corporate spending, it cannot reopen factories that are due to quarantines or a lack of workers and raw materials.

Investors are looking ahead to a meeting Thursday of the European Central Bank, which is widely expected to announce new stimulus measures.

Already last week, global stocks were sinking as the spread of the virus prompted governments to follow China's lead by imposing travel controls and canceling public events.

“The uncertain economic impact of coronavirus continues to grip markets, with stocks, commodities and interest rates all dropping sharply. Markets hate uncertainty and there is a ton of it currently in play,” said Greg McBride, CFA, chief financial analyst at Bankrate.com.

“The guidance for long-term investors remains intact – do not panic." said Mr. McBride. "As the uncertainty persists, the market frenzy will continue, perhaps for weeks, perhaps for months. But long-term investors must think in terms of years or decades.”

The U.S. Federal Reserve's emergency 0.5% cut in its key lending rate failed to reverse the downturn and the yield on the 10-year Treasury, already at record lows, dipped under 0.40% from 0.7% late Friday. The 30-year yield fell below 1% for the first time ever.

The yield – the difference between a bond's market price and what investors will receive if they hold it to maturity – is an indicator of the market's outlook on the economy. Rising market prices that cause the yield to narrow indicate investors are shifting money into bonds as a safe haven.

"Global recession risks have risen," Moody's Investors Service said in a report. "A sustained pullback in consumption, coupled with extended closures of businesses, would hurt earnings, drive layoffs, and weigh on sentiment."

This story was reported by The Associated Press.