The pre-market trends that already had suggested investors were in for another historic trading session turned out to be a whole lot worse at the opening bell. The coronavirus, mutual destruction among oil juggernauts, and widespread panic were the key ingredients in Black Monday’s recipe of declines, disasters, and destitution for institutional investors, retail traders, and margin accounts. It is time to pass the Pepto-Bismol.
Black Monday 2020
The Dow Jones Industrial Averages kicked off the trading week down more than 1,800 points to under 24,000. The S&P 500 crashed 7% to 2,764.21, and the Nasdaq Composite Index cratered 6.9% to 7,987.44. It was such a bloodbath that the circuit breaker triggered minutes into the session, and trading was suspended for 15 minutes.
Investors sought shelter in traditional safe-haven assets. The yield on the benchmark 10-year Treasury note fell below 0.5%, gold picked up $3.30 to $1,675 per ounce, and the Japanese Yen surged 3% against the U.S. dollar. The exchange-traded funds (ETF) and exchange-traded notes (ETN) that soar amid volatility were also climbing: The iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) spiked 40%, and the VelocityShares Daily 2x VIX Short Term ETN skyrocketed 80%.
Crude oil prices plummeted as much as 30% before paring those losses. April West Texas Intermediate (WTI) crude futures tumbled $8, or 19.3%, to $33.31 per barrel. The Energy Select Sector SPDR Fund (XLE), which monitors the energy industry, shed 15%.
Drinking Corona and Texas Tea
So, what is driving Black Monday 2020? A toxic mix of investors bracing for more economic fallout from the coronavirus and anxieties over a global oil price war.
Last week, the Organization of Petroleum-Exporting Countries (OPEC) recommended additional production cuts of 1.5 million barrels per day (bpd) beginning next month. The idea is that it would last until the end of the year when the Covid-19 pandemic subsides and international demand rebounds. When the cartel convened in Vienna over the weekend, Russia rejected the additional cuts.
After talks broke down, Saudi Arabia announced massive discounts to its official selling prices for April and will ramp up output to more than 10 million bpd – it possesses a capacity to boost production to 12.5 million bpd. The announcement caused fears of an all-out price war, and some analysts are warning that oil could crash to $20 by mid-spring. Other experts are optimistic that Saudi Arabia, Russia, and OPEC will reach a deal, which would make sense since Saudi Aramco is now a publicly-traded company. Until then, the money is betting on greater volatility.
The coronavirus, meanwhile, is still not showing signs of letting up. The death toll is nearing 4,000, and global confirmed cases have topped 111,000. Infections are increasing all over the world, U.S. politicians are self-quarantining, governments are unveiling stimulus efforts, and central banks are easing policy. The Federal Reserve recently confirmed it would boost cash injections for banks by expanding repo market operations to a total of $113 billion.
The next major concern in the U.S. economy is an interruption to supplies, especially in electronics, clothing, and furniture. Retailers are bracing for a $700 million hit over the next two months as the outbreak has impacted ocean shipping, and industry observers say we are close to “a real tipping point.”
If you think you have had it bad on Black Monday, then you have not met a Robinhood user. The commission-free trading platform was down again, causing customers to miss out on another monumental trading day, which has been a recurring theme for the company. So, take comfort in the fact that if your portfolio is shedding dollars and you are about to hit the sell button, Robinhood retail traders are losing even more than you are. Yep, pass the Pepto-Bismol!
Read more from Andrew Moran.