Mike Hosking interview with Grant Robertson 10th March
There will be anxious eyes on the New Zealand stock market this morning after Wall Street was rocked by yesterday's oil crash.
Stocks went into a steep slide on Wall Street this morning (US time) as a combination of coronavirus fears and a crash in oil prices spread alarm through the market, triggering the first automatic halt in trading in over two decades to let investors catch their breath.
The price of oil sank nearly 20 per cent after Russia refused to roll back production in response to falling demand and Saudi Arabia signalled it will ramp up its own output. While low oil prices can translate into cheaper petrol, they wreak havoc on energy companies and countries that count on petroleum revenue, including the No 1 producer, the US.
The clash between the two giant oil producers came as Italy — the country hit hardest by the coronavirus in Europe — began enforcing a lockdown against 16 million people in north, the heart of its manufacturing and financial industries. The turmoil is expected to push Italy into recession and weigh on the European economy.
The rapid drop in the oil price will also have an effect on the New Zealand market, with petrol prices likely to fall at the pump.
US stocks edged closer to a bear market, defined as a drop of 20 per cent from its record, while a measure of fear on Wall Street reached its highest level since the 2008 financial crisis. European stock markets fell even more sharply, and yields on US Treasury bonds plunged to more record lows as investors kept on sinking money into seemingly safer places, even as the return on their investment sank closer and closer to nothing.
The S&P 500 plunged as much as 7.4 per cent in the first few minutes after the opening bell, and losses were so sharp that trading was halted by the market's circuit breakers, first adopted after the crash of October 1987 and modified over the years. After the 15-minute pause, stocks trimmed their losses, and the index was down 4.8 per cent, shortly before noon.
The Dow Jones Industrial Average lost 1255 points, or 4.9 per cent, to 24,605 after briefly being down more than 2000. The Nasdaq gave up 4.4 per cent.
The market-wide circuit breakers have been triggered only once before, in 1997.
The carnage in the energy sector was particularly bad. With Brent crude oil falling nearly 19 per cent to just under $37 a barrel and benchmark US crude dropping to under $34, Marathon Oil, Apache Corp. and Diamondback Energy each sank more than 40 per cent. Exxon Mobil and Chevron were on track for their worst days since 2008.
"We knew it was going to be a hot day," said John Spensieri, head of U.S. equity trading at Stifel. He said that the mood was "organised chaos" in the morning but that the trading halt achieved what it was supposed to by stopping the slide.
The coronavirus has infected more than 110,000 people worldwide and killed around 3900, leading to factory shutdowns, travel bans, closings of schools and stores, and cancellations of conventions and other gatherings.
While the crisis has eased in China, where the virus was first detected, fast-growing clusters have turned up in South Korea, Iran and Italy, and fears are mounting in the United States, where a giant cruise ship idling off the California coast with at least 21 infected people aboard was scheduled to dock in Oakland on Monday so that the thousands on the vessel could be whisked to US military bases or their home countries for a 14-day quarantine.
After initially taking an optimistic view on the virus — hoping that it would remain mostly in China and cause just a short-term disruption — investors are realising they probably underestimated it badly.
Including Monday's drop, the S&P 500 has now lost 16.5 per cent since setting a record last month. If it hits a 20 per cent drop, it would mean the death of what's become the longest-running bull market for US stocks in history, an 11-year run. Monday marks the 11th anniversary of the market hitting bottom after the 2008 financial crisis.
A measure of fear in the US stock market soared to its highest level since 2008. That means traders are more worried about upcoming swings in the S&P 500 than they were during the European debt crisis or the US-China trade war.
The yield on the 10-year Treasury note plunged to 0.59 per cent. Early last week, it had never been below 1 per cent.
Traders are increasing betting that the Federal Reserve will cut interest rates back to zero to do what it can to help the virus-weakened economy, perhaps as soon as next week.
But doubts are rising about how effective lower rates can be this time. They can encourage people and companies to borrow, but they can't restart factories, restaurants or theme parks shut down because people are quarantined.
The Federal Reserve has already cut its benchmark short-term rate to a range of 1 per cent to 1.25 per cent, leaving it little room to cut more.
"Central banks are a bit player in the current crisis,'' Ethan Harris, global economist at Bank of America, wrote in a research report.
The clamour is growing louder for help from authorities besides central banks.
"Today's market action may bang some heads together and actually start thinking about the constructive measures the government can take,'' said Jacob Kirkegaard, senior fellow at the Peterson Institution for International Economics.
Among other things, Kirkegaard said, the government should make sure all Americans get paid sick leave and health care coverage for virus-related ills.
