As The World Burns.

US equity futures bumped along at limit-down as the world burned on Monday – “riders on the storm”.

Pre-market losses for oil majors piled up, while services and equipment names look set to drop precipitously at the open. The Saudis and the Russians have plunged the world into chaos. It’s just that simple.

European equities dove some 7%, the second-most since the financial crisis. Brexit was the only worse day for Europe in the last 10 years. Barring some kind of deus ex machina, US stocks are going to suffer one of the worst intraday slides in a decade once the limits come off.

The VStoxx surged to the highest since November of 2008. The Stoxx 600 Oil & Gas index dropped like a rock, falling as much as 15%, a record one-day slide. These moves are essentially unprecedented.

All of this comes on the heels of an Asian session that was, for lack of a better way to describe it, manifestly insane.

The FX trade was littered with flash crashes, Japanese equities tumbled nearly 6%, Australian stocks dove 7% and, of course, oil dropped as much as 31% to reflect the coming price war, which is the proximate cause of this very, very dark Monday. Analysts have variously warning of total chaos and “all-out” meltdowns.

“Unless [the Saudis] and the Russians can get back round a table or a conference call, we are going to find out the market clearing price for oil amid a global fall in demand. It’s likely to be ugly”, SocGen’s Kit Juckes said Monday morning, adding that “the market where most concerns may be felt will be the shale-heavy US high yield corporate bond market, where bad news and bad liquidity make for a particularly toxic mix”.

Indeed they do. Spreads in high yield energy are going to explode wider. It’s likely to be parabolic.

“By looking at [our] three indicators together, while we acknowledge a greater shift towards capitulation over the past week, we still find that our equity position metrics are overall some way from the capitulation levels of December 2018”, JPMorgan’s Nikolaos Panigirtzoglou wrote Friday. Suffice to say Monday could see a good, old-fashioned purge.

As for the Fed, it’s game over. I’m not totally sure what that entails, but I’m sure it’s an accurate description nevertheless. “[They’re] chasing a moving target”, MBMG’s Paul Gambles said, in an e-mailed note. “Most, if not all, of the bond market is now expecting US policy and market rates to pretty quickly fall to 0.25%”.

“”Markets are effectively expecting another Fed emergency cut as soon as today, with 100bps of easing priced in FFs by end March”, Nomura’s Charlie McElligott remarked, on the way to noting that “the true market focus remains not on ‘imminent’ policy rate cuts to ZIRP, but instead on 1) fiscal stimulus potentials 2) new liquidity measures (FX Swap Lines announced, additional / larger O/N and Term Repo ops), and 3) potential size- and scope- of Large Scale Asset Purchases (LSAP)–which the entire world is now expecting to be expanded in a broader asset fashion a la BoJ / ECB”.

“If the screen is to be believed, 30 year OIS is now 33 bps”, Bloomberg’s Cameron Crise wrote Monday morning, before dawn stateside. “This is pricing in the complete and utter Japanification of the American financial system”.


 

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12 thoughts on “As The World Burns.

  1. I might be a simple mind, but such a drop in the oil price is a huge boost for the economy except for the energy sector of course. So is it all related to the high yields blowing out for the shale oil companies or what….., because I do not understand why this positive boost effect all markets so negatively. Maybe there is another reason….??

    1. Oil is smaller part of GDP from a corporate level so less impact. And cheap oil doesn’t mean much if you lost your job.

  2. Since today doesn’t seem like it will be particularly cheery, I’ve been researching a lighter side note…

    Today is the 11th anniversary of the GFC market bottom in 2009. Doesn’t feel like bottom yet this time around, but perhaps we should create one of those “observance” days Congress loves to write up, anyway. Happy “Flaming Bottoms Day”, everybody!

    In further recognition of today’s likely noteworthiness, various folks are devoted to tracking observances, both federally recognized and others that are “popularly” recognized. The GFC seems to already have been noted – today is National Panic Day, suitably enough. It is also, a bit more officially, National Napping Day (1st monday after start of DST), but I think we can just cross that one right off the list. Finally, March is, no lie, National Optimism Month … so maybe that V-shaped recovery is right the around the corner!

  3. We are getting to the point where Mnuchin or Goldman will have to deploy the Omaha Sanction, where Grandpa Oracle emerges from this front porch and pens an article talking about his enduring optimism about American ingenuity and the fundamentals of the U.S. economy and his willingness to put his cash mountain to work. He will sell his Treasuries at record highs, buy equities at multi-year lows, and put paid to any notion of the determinism of gamma flows and robot overlords.

  4. “”Markets are effectively expecting another Fed emergency cut as soon as today, with 100bps of easing priced in FFs by end March”,

    I thought Powell made it clear that the US wouldn’t go down the path of negative rates (although in reality we’re already there).
    Whens the QE coming???

  5. Brakkie, What the Russians (and Saudis) are doing is trying to put the US shale companies out of business. They’re flooding the market with oil priced below what the shale oil companies can produce. If they succeed, they will be able to charge more for their oil. And the US will be, again, held for ransom by countries which are not our friends.

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