There will be investors waking up today and wondering if it was all a bad dream. But it was all too real. Oil did fall by the most since the Gulf War and global stock markets did have their worst day since the 08 crisis. Today will be like a hangover. All you can do is put a brave face on all the bad things that happened the day before.
Was it an overreaction?
The Dow and S&P 500 fell 7.8 respectively, the FTSE 100 fell -7.7%, Germany’s DAX was -7.9% and Italy’s FTSE MIB was down a whopping -11.2% on the day.
When you see oil having its worst day in three decades, the only thing to do is sell. On days like yesterday, the priority is the preservation of capital.
The sharp declines reflect markets trying to price the economic fallout from an oil price war and the coronavirus. Quarantines, goods shortages even civil disorder need to be priced in. We think we are probably not there yet.
Oil companies took the biggest hit. Shares of BP down by 19.5% in one day says it all. The energy sector may have just permanently lost its appeal. Oil prices this low will squeeze the margins out of many businesses. The oil majors will survive but the ugly choice will be between cutting dividends or taking on more debt. We think the divis will go.
There are companies, industries, and countries that benefit from a lower oil price and as the fog starts to clear we expect the respective areas of the market to benefit. But the fog is still dense.
Saved by the circuit breaker
The NYSE circuit breaker seemed to do its job well and while big, the declines were relatively orderly. The circuit breakers clearly prevent extra panic selling but we suspect they also delay the inevitable. It can be cathartic to rip the plaster off in one go.
Conveniently the 7% circuit breaker halted US stock market declines to leave the S&P 500 just 1% above registering bear market territory, 19% below all-time peaks.
OPEC kicked the legs out from under the market, but it was already wobbling after the US emergency rate cut failed to revive confidence. When considering the coronavirus; there is how bad the virus is itself and then there is how authorities respond.
Mood lightening on Tuesday
News that President Trump will hold another press conference on Tuesday to discuss the US government’s coronavirus response is aiding a pre-market recovery. Trump ‘talking’ to Congress about a payroll tax is reviving some lost animal spirits.
The prospect of higher government spending is helping investors overlook a rapid step-up in containment measures that will crimp economic activity. Italian Prime Minister Conte has now put all of Italy on lockdown and the US Centre for Disease Control (CDC) is warnings people over 60 or with illness to stock up with food supplies and stay at home.
Markets have gotten used to being saved by central banks, and the knowledge that central banks have less ammunition to save them this time is adding to the fear factor.
With the Fed looking impotent, there is extra pressure on Trump to deliver. Democrats won’t agree to a tax cut, especially in an election year. We’re not going to hang our hat on Trump saving the day.
On the data front, Eurozone GDP is old news but US small business optimism for February is one that could rock the market again.
Opening Calls:
FTSE 100 is set to open 192 points higher at 6157
DAX is set to open 243 points higher at 10,868
S&P 500 is set to open 95 points higher at 2841.
