US stocks plunged on Monday, with the Dow Jones Industrial Average closing down 2,013 points, or 7.8 per cent, in its single-day biggest point drop ever on crashing oil prices and coronavirus pandemic fears.
Standard & Poor’s 500-stock index also dropped 7.62 per cent, and the Nasdaq index fell 7.3 per cent. The sell-off, which began with the opening of the markets, triggered a circuit breaker shortly afterwards, and trading was halted for 15 minutes.
The drop on Monday was the fifth time that the Dow had fallen by more than 1,000 points during the presidency of Donald Trump, and was by far the biggest point loss. The 30-stock index ended the day at 23,851, with its percentile drop just short of the 7.87 per cent plunge on October 15, 2008.
The stock carnage was seen across the board, while US government bonds rallied as investors sought safe-haven assets. The yield on the 30-year US Treasury bill, which moves inversely to its price, dropped below 1 per cent to a historical low of 0.866 per cent before closing at 0.94 per cent.
“The scale of financial market moves in response to the coronavirus outbreak has been reminiscent of the global financial crisis. We do not think this is 2008, however,” analysts at BlackRock Investment Institute wrote in a Monday report.
“The virus shock’s impact will likely be large and sharp, but we believe investors should be level-headed, take a long-term perspective and stay invested,” the report concluded.
All sectors in the S&P 500 dropped, with energy falling the most, by 20 per cent.
Saudi Arabia decided over the weekend to cut oil prices by 10 per cent, escalating its fight against Russia in an oil price war, with potential implication for Venezuela and Iran as well as American oil companies.
Oil prices fell, with the Brent oil benchmark price tanking by about US$11 a barrel, or 25 per cent, late Sunday in the biggest decline since the Gulf War in 1991.
“So far, oil-related equities are tracking the oil price lower. We would eventually expect to see a bottoming out in stocks before the commodity itself,” said James Trafford, analyst and portfolio manager at London-based Fidelity International.
“But that bottoming will require some stabilisation in the coronavirus datapoints, or signs of a policy rapprochement among oil producers. In the meantime, investors should brace for volatility.”
New York stock markets joined the global jitters after markets in Asia closed significantly down earlier on Monday. Japan’s Nikkei 225 index closed down 5.1 per cent in its biggest daily drop since 2016. The benchmark stock index in Shanghai fell more than 3 per cent.
The Hang Seng Index in Hong Kong dropped more than 4 per cent on Monday.
“Hong Kong stock markets dropped in line with major markets in the region as the result of the falling oil prices,” said financial secretary Paul Chan.
“We are monitoring the market volatility closely and will ensure financial stability in Hong Kong with timely defence measures when needed.”
Markets have grown increasingly skittish in the past week amid rising worries about the continuing spread and reach of the novel coronavirus. The flu-like illness, known as Covid-19, originated in China in December and has spread worldwide in the past months to more than 80 countries.
While the number of new cases has been contained in China after the government took drastic measures to lock down hundreds of millions of people in the epicentre of Hubei province in January, community outbreaks are sprouting around the world in Italy, South Korea, Japan and the US. Overall, more than 110,000 cases have been confirmed globally.
The market sell-off on Monday “is a mix of speculation and amplified panic that has been triggered by the coronavirus”, said Ipek Ozkardeskaya, an analyst at Swissquote.
A solid US jobs report released on Friday showed that the economy added 273,000 nonfarm jobs in February, almost 100,000 more than expected, indicating the economy remained strong.
Ozkardeskaya said that “economic data in the US so far shows that the coronavirus fears have not been materialised as badly as priced in”.
“We believe that once the OPEC shock is left behind, it will gently be time to consider a justified upside correction to the current bear market.”
But economists have sounded alarms that the virus could wreak havoc on the global economy. The International Monetary Fund chief economist on Monday urged policymakers to institute “substantial” fiscal and monetary policies to help consumers and businesses counter Covid-19’s economic harm.
The Federal Reserve Bank in New York announced it would increase its daily injections of cash into financial markets by US$50 billion to US$150 billion to boost market liquidity.
After the Federal Reserves cut the benchmark interest rates by 50 basis point last week, economists are questioning what tools the Fed have left to counter an economic slowdown when the impacts start to show up in the second quarter.
Some market strategists said that even with the adjustments in the stock market in past week, the measures haven’t gone far enough.
“Even after the recent decline, P/E ratio, a key indicator of stock valuation, in S&P 500 remains close to its cyclical average,” said Charles Dumas at TS Lombardi in a research report on Monday.
“We forecast the combination of negligible earnings growth this year with cuts in forward P/E ratio could take the S&P 500 down to the 2,500 level, more than 25 per cent down from its February 19 peak,” Dumas said.
It’s always the ones with the dirty consultants that do the clean audits.