Good Morning America, All Heck Broke Loose in the Markets Overnight
Crude Oil Collapses 32%, US Stock Futures Plunge nearly 5%, 10-year Treasury Yield Gets Closer 0%, Gold Jumps to $1,700, Asian Stocks Plunge, Nikkei -6%.
By Wolf Richter for WOLF STREET.
WTI crude oil futures collapsed by 32.3% on Sunday evening, to $27.96 a barrel at the moment, the lowest since the darkest oil-bust days of February 2016:
This plunge comes after Saudi Arabia’s Aramco announced it would slash prices to its customers for April. In addition, there were strategically placed rumors that Aramco would also increase production from the current 9.7 million barrels per day to 10 million barrels per day when the previously agreed production cuts expire at the end of March. This is its move in a price war with Russia over market share.
On Friday, Russian Energy Minister Alexander Novak had thrown down the gauntlet when he told reporters at the OPEC+ meeting in Vienna: “As from 1 April we are starting to work without minding the quotas or reductions which were in place earlier.”
The primary target of this price war, however, are the investors in the US shale oil sector. These investors – chasing yield and looking for deals – have been fueling the shale oil sector’s relentless and highly efficient cash-burn machines with hundreds of billions of dollars over the years. And the sector keeps ramping up production not matter how much money they lose and how much cash they burn.
By crushing these investors and sending a bunch of these shale-oil companies into bankruptcy, Saudi Arabia and Russia might hope that new money will refuse to flow into the US shale oil sector, and that the companies will run out of cash to burn, and that production in the US will finally decline and take some pressure off the market.
The timing is impeccable. US shale oil production is still hitting records, flooding the market with crude oil and petroleum products, even as OPEC and Russia were trying to agree to lower production to prop up prices in of face declining global and US oil consumption, now driven by plunging demand from airlines globally and from drivers in China and other countries that have been hit hard by the coronavirus.
If OPEC and Russia increase production in the second quarter, with US production still ramping up and demand globally in steep decline due to the efforts to slow the spread of the coronavirus, then global markets will be awash in oil. And the expected collapse in prices is now being priced into crude oil futures.
Stock Futures Plunge.
US stock futures plunged in overnight trading, with futures on the Dow Jones Industrial Average down 1,222 points, or 4.7%; with the Nasdaq futures down 4.8%, and with S&P 500 futures down 4.9%:
Asian Stock Indices plunge.
In early trading on Monday in Asia, it was bloodletting-time all around:
- Japan’s Nikkei 225 index: -6.1% to 19,473.
- Hong Kong’s Hang Seng: -4.0% to 25,075.
- In China, despite the government, state-owned banks, and state-controlled market players struggling mightily to contain the damage, the Shanghai Composite Index: -2.4% to 2,961.
- India’s BSE Sensex: -3.3% to 36,340.
- Singapore’s FTSE Straits Times Index: -4.4% to 2,832.
The 10-Year Treasury Yield Falls Closer to 0%.
Under huge demand by spooked investors trying to flee risky assets, 10-year Treasury prices rose and the yield plunged 25 basis points from the record-low close on Friday, following the plunge on Friday and the plunges on prior days. Sunday night, the yield fell to 0.496%.
The chart below reeks of fear. The Fed should just take this opportunity to express its unbroken confidence in the markets by doing the opposite of what those spooked investors are doing, and it should sell its longest-dated Treasury securities, which would not only inspire confidence but also satisfy investor demand, hahahaha:
In line with the theory that this is sheer fear expressing itself here, gold futures jumped 1.6% Sunday night, or by $28 an ounce, to $1,702 an ounce, the highest since December 2012.
So this turmoil in the markets overnight should — and I’m going to stick my neck out here — make for some highly caffeinated trading in regular hours in the US on Monday. Whiplash warning in effect.
Airline bonds, holy moly. Read… It’s Crazy in the Treasury Market, But the Corporate Bond Market is Starting to Dial in the Coronavirus
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