Mid-Morning Look

Monday, March 09, 2020

It is another bloodbath on Wall Street today as plunging oil prices join market jitters of the coronavirus impact to stocks that sent markets sharply lower, which has resulted in a trading market halt. U.S. stocks were paused for 15 minutes just a few moments after major U.S. averages opened after tumbling more than 7%, triggering a market-wide trading halt amid an extreme “risk-off” move in the financial markets due to the fear surrounding the COVID-19 virus (that had already sunk major averages more than 10% from peaks) and the most recent Saudi oil decision to lower prices, leading to a mass exodus of global stock markets and further rotation into the safety of Treasury markets. So not only has the S&P 500 (SPX) seen the fastest 10% correction from record levels in the history of the markets, it has also shown incredible movement in other measures of risk such as bonds, volatility, and corporate debt with investors scrambling for asset protection. A plunge in oil prices added to weeks of concern that the spreading coronavirus will derail the global economy as WTI crude oil fell as much as 34% to $27.34 a barrel, the worst day since the Gulf War in 1991, after Saudi Arabia initiated an all-out price war. At this point, there is no slowing of the cases in the coronavirus as well, with new cases popping up around the country and globe, while the oil plunge adds a new twist that is crushing major oil companies (raising fears of halted production, bankruptcies and defaults). Transports tend to benefit from lower oil, but also have to deal with the slowing travel demand due to the virus. Banking stocks crushed on declining Treasury yields (hitting lending margins as well as fears of exposure to energy loan defaults). Overall not a pretty picture to start the week, with investors hoping for some sort of possible coordinated central bank stimulus effort to at least temporarily stop the market bleeding. The latest on the coronavirus was confirmed cases up to 110,000 and death count at more than 3,800. The Cboe Volatility Index (VIX) surged to the highest since 2008, rising as high as 62, its highest level since December 2008.

Treasuries, Currencies and Commodities

·     In currency markets, the U.S. dollar fell vs. the safe haven Japanese yen, falls over 300 bps vs. the Japanese yen to 102.20 (down 3%), to its lowest levels since November of 2016; the euro jumps 1.2% to move above 1.14 vs. the dollar to its best levels since January of last year; but the greenback advanced vs. emerging market currencies (CAD, RUB) especially given the impact on those economies from plunging oil prices today. Commodity prices grabbing all the headlines today, with oil prices dropping more than 30% earlier given the Saudi price war started this weekend targeting Russia, while gold prices edge higher

·     Treasury market’s rally again as yields plunge to unprecedented historically record lows as the 10-year yield rebounds back to 0.54% off earlier record lows of 0.3137%, while the 2-year yield fell as much as 26 bps to record low of 0.245% before paring losses and the 30-year yield plunging to record lows just below 0.7% before paring losses back to around 1% (which was still down roughly 30 bps) as investors fled to safety on bonds; the German 2-year gov’t bond yield falls to record low at -0.968% as yields overseas also feeling the effects

Sector Movers Today

·     Energy stocks with destruction beyond market comprehension, already dealing with fears of sharply reduced global demand due to the coronavirus impact on businesses and travel over the last few weeks…the energy sector slammed amid a price war between Russia and Saudi Arabia after the Middle East oil producing giant Saudi Aramco significantly discounted barrels with plans to ramp production next month after the expiry of the current OPEC+. The move was a response to Russia who Friday balked not only on increasing oil supply cuts but even extending existing oil cuts that end in three weeks. Some of the largest oil companies (XOM, CVX, BP, COP, OXY, TOT, MRO, RDSA) service names (SLB, HAL, BKR), drillers (NE, RIG, DO), refiners (VLO, DK, PSX, HFC, MPC), and E&P names (FANG, APA, PXD, MUR, NBL, CXO, HES) plunged – fears of more defaults and bankruptcies likely to pressure many small and midcap tier names

·     Bank movers; recent stock market destruction amid economic impact fears from the coronavirus on businesses took another turn lower today given the devastation in oil markets following the price war between Russia Saudi Arabia has pushed Treasury yields to unprecedented low levels, weighing heavily on financial institutions that will be affected due to their now sharply reduced lending margins, as well as reduced assets due to stock market destruction; shares of big banks, European banks, regional banks, brokers absolutely crushed on the day. Other factors that are weighing on banks, fears of loans potentially not being able to get paid back by energy companies given the destruction in the oil markets. The KBW Bank Index closed down 4.5% on Friday at the lowest since December 2018 and is down 26% so far this year. High yield concerns; Energy-related companies make up about 10% of the high-yield universe, so the 25% plunge in oil prices and related crash in the equity of energy companies is creating a blowout in high-yield spreads

·     Casino & Leisure movers; Cruise line stocks continue their downward spiral (CCL, RCL, NCLH) as the misadventures of the Grand Princess cruise ship off the coast of California show 2,421 Grand Princess passengers will still have to take another two or three days to be routed to their destination in a secure fashion, highlighting the risk of taking a cruise right now. Meanwhile, the U.S. State Department had advised citizens not to travel by cruise ship if they have an underlying health condition; casino related stocks (LVS, WYNN, MGM, MLCO) as well as theme parks (DIS, SIX, SEAS, FUN) and other leisure elated names (AMC, MTN, LYV) remain pressured on virus demand impact with more cases this weekend