Stocks Plunge While Bonds Hit New Lows as Oil Price War and Virus Combine Into ‘Perfect Storm’

March 9, 2020 Updated: March 9, 2020
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Stocks plummeted and investors rushed into safe-haven bonds Monday, as the worst one-day crash in crude oil prices in 30 years combined with ongoing coronavirus fears into a perfect storm that sparked a selloff dramatic enough to trigger a temporary curb on trading at the New York Stock Exchange.

The dramatic flight from equities followed the collapse of a supply-constraint alliance between OPEC and Russia, with Saudi Arabia launching a price war by announcing Sunday it would cut crude prices and increase production.

All three major Wall Street indexes—Dow Jones, Nasdaq, and S&P 500—closed over 7 percent down in one of the worst days on Wall Street since the financial crisis.

The blue-chip Dow lost over 2000 points in what was its biggest single-day points drop in history.

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Table showing the main three Wall Street stock indexes—the S&P 500 (SPX), Dow Jones Industrial Average (DJI), Nasdaq Composite (IXIC)—along with the VIX volatility index, or “fear gauge”, and the U.S. 10-year and 30-year bonds, on March 9, 2020. (TradingView)

‘I’ve Never Seen This’

After scaling record highs as recently as three weeks ago, the S&P 500 is now only about 2.5 percent away from moving into bear market territory, in one of the most dramatic turnarounds in living memory. A bear market is defined as 20 percent down from a recent market high.

“Well, in the short term, I think we should be worried,” said Peter Cardillo, chief market economist at Spartan Capital Securities, in remarks to Reuters. “But I also believe that even if we go into bear market territory, I don’t think it’ll be long-lasting.”

The benchmark 10-year U.S. Treasury note, whose yield falls as its price rises when refuge-seeking investors pile in, dipped in overnight trading to an intraday record of 0.339 percent, according to The Wall Street Journal, citing Tradeweb figures. The 10-year closed on Friday at 0.709 percent.

“I’ve never seen this and I’ve been doing this for 30 years,’’ said Scott Thiel, chief fixed-income strategist at BlackRock, in comments to The Wall Street Journal.

“It’s about risk management,” he added, explaining that bond yields were being driven lower by investor fear of what may lie ahead for the economy and markets.

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The 10-year U.S. Treasury note hit a new intraday low on March 9, 2020. (TradingView)

Volatility Reigns

Wild swings in markets were evident in volatility measures in both stocks and oil on Monday.

The Wall Street “fear gauge,” or the VIX volatility index, which is a measure of implied market swings, shot up to nearly 60, a level not seen since the 2008 financial crisis.

A reading above 31 is considered to be reflective of extreme levels of investor fear and uncertainty.

“When you look at volatility regimes, once you get above 31 on the VIX you have an uninvestable environment. … There’s no valuation as a catalyst,” explained Hedgeye CEO Keith McCullough, on the Feb. 28 episode of “The Macro Show.”

“If my market signal doesn’t give up greater than 31 on the VIX I’m not buying a damn thing on this ‘dip’ because it’s not a ‘dip,’” McCullough added.

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VIX volatility index, dubbed the “fear gauge,” spiked to nearly 60 on March 9, 2020. (TradingView)

The oil price volatility index, or OVX, hit an all-time record high Monday.

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Crude oil volatility index (OVX) on March 9, 2020. (TradingView)

‘Perfect Storm’

Crude oil prices plunged by around 20 percent Monday, sending oil majors Chevron Corp and Exxon Mobil Corp down more than 9 percent.

State oil giant Saudi Aramco said in a statement March 7 that it was cutting its official selling price for April for all its crude grades to all destinations, amounting to unprecedented discounts of nearly 20 percent in key markets.

The move has been widely reported as an overt bid to wrest market share away from Moscow after talks between Russia and the Organization of the Petroleum Exporting Countries (OPEC) failed to agree on production cuts amid a coronavirus-driven collapse in oil demand.

“Look, you’ve got one of the most powerful commodities in the hands of two of the largest superpowers in the world, and they are not agreeing on it,” said Peter Tuchman, NYSE trader, in comments to Reuters. “And you throw that on top of a market that’s full of anxiety about the potential economic global slowdown due to the virus, which I don’t even think we’ve seen yet, and you end up with a perfect storm. That’s what we have in there today.”

While cheaper oil will translate into more affordable energy for consumers and businesses, it hurts producing countries and companies.

Reuters contributed to this report.

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