The New York Stock Exchange halted trading this morning due to the circuit breaker of a 7% intra-day loss being breached on the heels of Coronavirus spread and the surprise decision made by Saudi Arabia to slash prices and increase production of oil. These circuit breakers were put in place in an effort to calm market trading during times of extreme stress & panic. Markets have been experiencing wide spread volatility over the course of the last two weeks and this past weekend’s events added to the market’s fears. While the effect on stocks has certainly been front and center, the fear has gripped the bond markets, sending interest rates to their lowest levels in history. The entirety of the U.S. Treasury curve going out to 30 years is now below a 1% yield.
One major catalyst for the heightened volatility was the plunge in oil prices as a result of Saudi Arabia’s decision at the weekend OPEC meeting to instigate a price war on oil. Early on during OPEC’s meeting in Vienna last week, Russia refused to agree upon a cartel-wide production cut in order to bolster already falling oil prices, believing that the move would be too beneficial to U.S. shale producers. In response to their non-compliance, Saudi Arabia put forth plans to slash prices and increase production in a direct shot at Russia’s market share. The response in the oil markets was precipitous, with more than a -20% drop and WTI crude pricing in the low $30’s per barrel. The size of the drop in prices signals not only a price war being waged, but also a steep decline in demand based on lower economic activity, which we believe to be overstated. Oil experienced a similar shock toward the end of 2015 when crude fell to $25/barrel as U.S. supply rose and OPEC made the decision to keep their cartel’s production at the same level.
The impact of the Coronavirus continues to expand globally. Reports came out this weekend that the Northern Italian region of Lombardy which is home to 16 million people will be quarantined until April 3rd. Here in the U.S., the number of confirmed cases stands at over 500, while deaths rose to 22. The U.S. has ramped up efforts to contain the spread of the disease, including the cancellation of some widely attended events and temporary school closings. The lasting effects of Covid-19 and its containment efforts are still unclear but previous infectious disease episodes have resulted in temporary, albeit painful, economic disruptions.
Global central banks have been active in easing and maintaining liquidity in the markets with our own Federal Reserve announcing a 50 basis point cut to the Fed Funds Rate last week with potentially more cuts coming. The Federal Reserve also announced today that they will increase the amount of short-term loans it is offering to money markets to due to funding strains resulting from the coronavirus and an increased demand for short-term lending. This adjustment was designed to make sure the supply of bank deposits held at the Fed, called reserves, “remains ample and to mitigate the risk of money market pressures that could adversely affect policy implementation,” the New York Fed said. “They should help support smooth functioning of funding markets as market participants implement business resiliency plans in response to the coronavirus.” Coordinated fiscal policy efforts are being discussed and would be a welcome development, as they have a more direct influence on day-to-day activities than monetary policy and would have a larger impact on damaged consumer sentiment.
The Investment Team at Old Second Wealth Management continues to monitor these situations closely and how they affect the fundamentals of the economy. As always, should you have any questions please reach out to your Relationship Manager or Investment Officer.
Rich Gartelmann, CFP® – (630) 844-5730 – firstname.lastname@example.org
Steve Meves, CFA® – (630) 801-2217 – email@example.com
Brad Johnson, CFA®, CFP® – (630) 906-5545 firstname.lastname@example.org
Mike Cava, CFA®, CFP® – (630) 281-4522 email@example.com
Mike Demski – (630) 966-2430 firstname.lastname@example.org
Jacqueline Runnberg, CFP® – (630) 966-2462 email@example.com
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