CITY 5314 March 2020 THE WEEKTalking points“Injustovertwoweeks,investor
sentimenthasswungfromcomplacency
topanic,”saidPaulO’ConnorofJanus
HendersonInvestorsintheFT.“What
startedasavirus-drivende-riskinghas
mutatedintoabroad-based,multi-asset
capitulation.”Therewasnoescaping
thecarnageontradingfloorsaroundthe
worldthisweek,saidLouisAshworthin
TheDailyTelegraph.Globalmarkets
sufferedtheirworstdaysincethe 2008
financialcrisis,andthesell-offwas
quicklydubbedthenew“Black
Monday”–areferencetothe 1987 stock
marketcrash.Morethan£ 12 4bnwas
wipedofftheFTSE 100 inaday;when
“WallStreetwadedintothechaos”,US
stocks“cratered”sobadly(fallingby 7 %infourminutes)they
triggeredcircuit-breakers,automaticallysuspendingtrading.
“Marketslikebouncing,”saidJohnAuthersonBloomberg,
andbothstockandbondmarketsdulyattemptedareboundon
Tuesday.Thebenchmarkten-yearTreasury yield shot upfroma
lowof0.314% onMondayto hit 0.8 03 %–“byfarthegreatest
volatility thebondmarkethasexperiencedsincethecrisisof
2008-09”.Butdon’tbeton theblood-lettingbeingover. “The
physicsof marketsare such thatbigandsuddencrashesare
followedbybigrebounds.”And history suggests that“stockswill
needtoadjustforquitealotlongerbeforetheyfindalevel”. The
greatmarketcrashesof 1929 and2 008
(whichbothledtobearmarkets)also
sawbigrebounds.“Weneedtoknowa
lotmorebeforeweknowifthisincident
willturnintoabearmarket”,butsofar
what’soccurredisconsistentwiththose
historiccrashes.Sharepricesmaybeno
higherinamonth’stimethantheywere
atMonday’slows.“Abottomwillnot
bereacheduntilinvestorsloseallhope.”Today’sturbulentmarketsresemble
thoseofthefinancialcrisis,said
MohamedEl-ErianintheFT.Andonce
again,there’sa“growinglikelihoodof
recessionamongalengtheninglistof
countries”,includingGermany,Italy
andJapan.Butthere’ssomegoodnews.Becausethissell-offdid
notoriginatewithbanks,itdoesn’t“endangerthenervesystemof
allmodernmarket-basedeconomies,namelytheirpaymentsand
settlementssystems”.Thatsaid,governmentsnowaddressingthe
turmoilaredoingsofromaweakenedposition:“toomuchpolicy
ammunition”hasalready“beenfiredinefficiently”.Ifthey’re to
stopwhatcould become“a viciouscycle”–whereaworsening
realeconomydragsdownmarkets, and then markets drag down
the economy –theyneedto deploy“laser-targeted measures to
create asustainableeconomicfloor”. And they need todoit inan
internationallycoordinatedway.Atallorder,no doubt, but“the
fas terit’sdone,thestrongertheeconomic turnaroundwillbe”.Issue of the week: the new Black MondayAWallStreettrader:“wadingintochaos”The oil shock: what the experts think●“A regretful day”
Whentalks between
theOpeccarteland
Russiaon theissue
of productioncuts
broke downlast
Friday,Saudi
Arabia’senergy
minister, Prince
Abdulazizissued
an ominous verdict.
“Todaywillbea
regretfulday.”He
wasn’tkidding,said
EmilyGosdeninThe Times.Thepriceof
Brentcrude, already down fromapeakof
$68/barrelatthe start of the year, plunged
by almostathirdonMonday–the biggest
drop since the1991Gulf War–before
recovering slightly to trade20%lowerat
around$37. Andmanyanalysts expect it
to fall further. JonRigbyofUBSwarned
that prices coulddip to $30 before
“someone blinks”,while Bank of America
and Goldman Sachs reckontheprice could
fall as low as $20. This wouldhave huge
implications for stockmarkets andthe
globaleconomy.
●Major trouble
“This is not the firsttimewe’vehad a
shockto theoil market,butitisthe first
time thatIcan recallthatyou’vehada
supply shock andademandshock at the
same time,” Stewart GlickmanofCFRA
Research told the BBC. The threat of an oil
glut hascollidedwith
aseverereductionin
demand linkedto
fears aboutthe
coronavirus,and
“thecraziness that
you’re seeingin the
oilprice isa
reflectionofthis”.
Certainly,thebigoil
majorswereamong
thechieflosers in
Monday’sstock
marketrout,saidEd
Clowes inTheDailyTelegraph. Shares in
“corporate titans”Shell and BP fell by
nearlyafifthamidapanic over the
dividendsthey contributeto millionsof
savers’ pensionpots.Andseveral smaller
explorers,suchasPremierOiland Tullow,
were left fighting for survival.●Toobigtofail?
Asustainedprice collapsecould trigger “a
new phaseofdeep industry restructuring”,
said theFT, especiallyinthe USshale
industry, whereoilat$30is “well below
the break-even price”for mostwells.
Analystssaid that “dozens ofsmaller shale
companieswouldnowgo bust”–with
potentiallydrastic geopolitical implications
giventhe role shalehasplayed in helping
end US dependenceonMiddle Eastern oil.
“This is the financial crisis foroil,”said
IanNieboerofRSEnergy, exceptin this
case“theproducersaren’t toobig t ofail”.“Thisisthefinancialcrisisforoil”Succour for business
One thing that both business leaders
and HM Treasury can agree upon is that
this week’s Budget came “atavery
timely moment”, said Simon Jack on
BBC Business. “But not inagood way.”
The three things that business wanted
most were, in no particular order,
“cash, cash and cash”. The Chancellor
took some steps to dish it out, with
particular emphasis on vulnerable
small firms.Those with fewer than 250 staff will be
refunded sick pay payments for two
weeks; and small firms will also be able
to access “business interruption” loans
of up to £1.2m. Business rates were
also abolished for companies in the
retail, leisure and hospitality sectors
with arateable value below £51,000.There’s no doubt that the crisis faced
by Britain’s companies is very real,
said Callum Jones in The Times. The
Institute of Directors has warned of a
“cash-flow crunch” amid the prospect
of falling orders and quarantined
workers. And the post-election “Boris
bounce” in confidence has been
destroyed by the outbreak. More than
one in five bosses reckon that Covid-19
posesa“high” or “severe” threat to
their companies, and around half of all
directors “are now pessimistic about
the economy”. The Institute’s chief
economist, Tej Parikh, sees no end to
this “dramatic” dip in confidence. The
lack of clarity, he said, “eats into the
outlook for the year ahead”.Trillionshavebeenlost.Butisthiscrashasbadasthereallynastyhistoricalones?