TOKYO, March 9 (Reuters) - Financial markets have been thrown into turmoil after Saudi Arabia slashed oil prices and the coronavirus continued to spread, jolting investor confidence and sparking fears of a global recession.
Following are comments from analysts:
“If a production cut agreement is not quickly reached between Saudi and Russia, we’re on the precipice of total value-at-risk implosion. But oil prices could speed down to, or through, the weakest levels of 2015/2016.
“Bankruptcies and demand for short term credit will trigger a massive liquidity squeeze. Euribor fixings are the ones to watch today since they will be first up. A spike in these will confirm the beginning of a much more protracted move. But it’s not just oil town USA (Houston) that is at risk of turning into modern-day ghost town. Pretty much everywhere else that’s a price taker in the global oil markets is at risk.
“The hit to oil prices will likely mean a progressively weaker U.S. dollar, in lockstep to falling oil prices, against the euro, and perhaps even more so against the yen as the U.S. credit impact shock is just starting to get baked into the cake.”
“Wild is an understatement. I figured maybe we’d see a 5% or 10% drop in the oil market, but 25% down has literally just spooked the rest of the market. We’ve got S&P futures limit down at a eleven in the morning in Singapore.
“Not just us, but across the globe you would have every broker/dealer raising their margin requirements...trying to basically protect our clients from trying to leverage too much risk or guess where the bottom is.”
KEN POLCARI, SENIOR MARKET STRATEGIST, SLATESTONE WEALTH LLC IN JUPITER, FL:
“Between oil and the virus, the headlines are creating hysteria right now. High yield will get crushed and credit defaults will be the talk all over again by week’s end if oil doesn’t rebound. And in the middle of all this North Korea launches a missile. Just more negative headlines that are not helpful.”
MICHAEL FARR, PRESIDENT, FARR, MILLER & WASHINGTON LLC, WASHINGTON, DC:
“What I’m seeing is a confluence of two black swan events: Coronavirus reaction and oil.
“Investors haven’t gone to guns and butter yet. They haven’t made the shift to Procter & Gamble and Pepsi Cola from tech stocks. Those are the sort of things I look for, but until I see that I’m struck that there’s more downside vulnerability.
“The other side of it is debt. As oil prices fall and credit markets tighten, a lot of companies are not going to be able to refinance their debts or extend maturities.”
CHRISTOPHER STANTON, CHIEF INVESTMENT OFFICER, SUNRISE CAPITAL PARTNERS LLC, SAN DIEGO:
“What the Saudis have done is just madness. This would have been enough to get us going on any given night.
“Doesn’t anybody think maybe these bank loans to energy producers are going to start going upside down? When that happens the high-yield sell-off and oil sell-off alone injects volatility into the markets. And then you add the coronavirus thing on top.
“People went over their skis, they got absolutely greedy and momentum traded. Can you think how much money has entered the market at those terrible levels?
“This could get a lot worse. We are heading for levels that better hold. If the U.S. Federal Reserve cuts another 50 (basis points) and this market still closes down, holy moly. That would just tell you the market has no confidence in the Fed.”
VASU MENON, SENIOR INVESTMENT STRATEGIST, OCBC BANK WEALTH MANAGEMENT, SINGAPORE:
“Oil is facing a double whammy due to the impact of coronavirus and OPEC talks falling apart.
“The implication for financial markets is that there could be some liquidation in more profitable positions just to cover the losses in oil markets. Oil markets have added just another layer of uncertainty but what’s more important at this juncture is COVID-19.
“Is this a buying opportunity (for equities)? I would be careful. To me, the inflection point really has to be when COVID-19 infections outside of Asia start showing signs of peaking and we’re not there yet.
“This is not the best time to buy on dips. The macro picture is still very uncertain, things are still playing out and infection numbers in the West are still rising. Against these sort of headwinds, it’ll be foolhardy for investors to really jump in.”
PAUL NOLTE, PORTFOLIO MANAGER, KINGSVIEW ASSET MANAGEMENT, CHICAGO:
“The energy decline is piling on. So now what you have with much lower oil prices is a heightened possibility that you are going to see defaults in some of the energy sector bonds, and I think that’s what has got the equity markets concerned, that this can go on for a while as OPEC tries to figure itself out.”
BILL ZOX, CHIEF INVESTMENT OFFICER FOR FIXED INCOME, DIAMOND HILL CAPITAL MANAGEMENT, COLUMBUS, OH:
“While some assets are priced for recession, most are not. Monetary and fiscal policy will be of limited effect until prices more broadly reflect a very high probability of recession.”
“We are in an Armageddon situation. We could move down 30% in the equity markets in the next 30 days. We are at floor 8 after a jump off a 20 story building.
“The 10 year is your growth rate, give or take a little. That means growth in essence went from a little over two to basically zero overnight. Two quarters of negative gross domestic product is a recession. We will most likely get that.
“It also puts U.S. President Donald Trump’s election at risk. The market has not caught up to the facts.
“The bond market action is something I have never seen in my lifetime. The argument that low rates mean cheap money... doesn’t hold because credit gets tight and cash disappears.”
MASAYUKI KICHIKAWA, CHIEF MACRO STRATEGIST, SUMITOMO MITSUI ASSET MANAGEMENT, TOKYO:
“I don’t think the end goal of the Saudis is to collapse the oil market. This is more likely a tactic to get Russia back to the negotiating table.
“I am sure that behind the scenes the United States and Saudi Arabia are trying to get Russia to return to negotiate. The problem is we do not know how long this will last, so investors have no choice but to sell risk.
“If this is prolonged, we need to monitor the impact on the high-yield credit market, because companies that have been issuing these bonds recently are concentrated in the energy sector.”
MICHAEL O’ROURKE, CHIEF MARKET STRATEGIST, JONES TRADING:
“The news over the weekend took a turn for the worse. The latest round of negative headlines about COVID-19 included Italy’s decision to quarantine 16 million Italians in the Lombardy region until April 3.
“The bigger story is Saudi Arabia’s response to the Russia driven breakdown of OPEC+. The kingdom has chosen to use its position as the lowest-cost producer to undercut its competition, especially Russia, and flood the market with oil.”
“These events will have notable market ramifications. Ironically, had these events occurred prior to the COVID-19 outbreak, they would have been viewed as bullish. Auto companies would rally and so would airlines and materials companies that use crude as an input.
“Of course, energy companies would come under pressure, as would electric vehicle companies. Overall, lower oil prices are a positive for the real economy. That said, those groups that would stand to benefit are grappling with a much larger economic uncertainty tied to coronavirus.”
ANDREW BRENNER, HEAD OF INTERNATIONAL FIXED INCOME AT NATALLIANCE SECURITIES, NEW YORK:
“Sunday night panic is here as the markets open... Oil is down 22% due to the Saudis sending the Russians a message and opening up the spigots.
“If cash (Treasuries) were trading, it looks like the long bond would be close to 1.125% and the 10-year around 0.60%. (Reporting by Stanley White in Tokyo, Anshuman Daga and Tom Westbrook in Singapore, Megan Davies, Kate Duguid, Ira Iosebashvili, Chuck Mikolajczak and Lewis Krauskopf in New York; Editing by Tom Hogue and Shailesh Kuber)