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The collapse of crude oil prices and the global spread of the novel coronavirus delivered a double blow to investors on Monday, skewering stocks and raising alarms about the health of Canada’s struggling energy sector.

The result was the worst one-day drop in the Canadian stock market since the crash of October, 1987.

The S&P/TSX Composite Index sank 1,660.78 points, or 10.27 per cent, to 14,514.24.

The TSX drop was among the worst in a global rout. The S&P 500 fell 7.6 per cent, after trading was briefly halted early in the day owing to the sudden drop, bringing the total decline since Feb. 20 to 18.9 per cent. It marked the index’s biggest one-day decline since December, 2008, during the depths of the financial crisis. Britain’s FTSE 100 fell 7.7 per cent and Japan’s Nikkei 225 fell 5.1 per cent.

But those declines pale in comparison to free-falling crude oil prices, which plummeted more than 25 per cent – the biggest decline in nearly three decades – after Saudi Arabia announced plans to increase oil production in a bid to secure market share.

“Today’s price action puts at risk the fiscal health of the vast majority of sovereign producers and budget cuts and increased debt loads are now looming in the event of a prolonged period of low prices,” Helima Croft, global head of commodity strategy at RBC Dominion Securities, said in a note.

On the weekend, Saudi Arabia effectively declared a price war against Russia, ending a tenuous alliance between the two countries that helped to keep the global oil market stable.

Instead of cutting production to support higher prices, as the market expected, Saudi officials made plans to accelerate output. The global oil market was already wrestling with a potential demand shock as a result of the coronavirus outbreak, as city lockdowns and the waning appeal of international travel have eroded the demand for jet fuel and gasoline.

Now, oil traders are factoring in a potential supply shock as well.

West Texas Intermediate fell below US$31 a barrel in Monday trading, down 25 per cent. The main Alberta crude benchmark dropped below US$18 a barrel, down 36 per cent.

“The latest breakdown in talks implies a potential addition of up to 2.1 million barrels per day to an already-oversupplied market,” Omar Abdelrahman, an economist at Toronto-Dominion Bank, said in a note.

For Canadian oil and gas stocks, already weakened by a multitude of pressures, from the coronavirus to the pipeline debate to the anti-oil sands environmental movement, the reaction to Saudi’s about-face was swift and severe.

Integrated producers, pipelines and energy services companies were all hit with steep losses. Large oil sands names were down by a minimum of 17 per cent, in the case of Imperial Oil Ltd., and up to 52 per cent for shares of Cenovus Energy Inc.

Canada’s junior and mid-size exploration and production (E&P) companies are particularly vulnerable, Canaccord Genuity analyst John Bereznicki said.

“If low prices prevail, we anticipate significant budget cuts, with reductions in dividends also likely,” Mr. Bereznicki said.

As a whole, the energy sector within the benchmark index is now trading below the lows set during the global financial crisis more than a decade ago.

Oil market volatility rippled through the rest of the Canadian stock market, including the big banks, which have billions of dollars of loans to the energy sector on their books – in addition to their exposure to the broader global economy.

The Big Six banks fell between 8 per cent and 14 per cent, sending the sector to its lowest level in nearly four years.

“For the banking sector in particular, these latest developments also raise the … probability that non-residential, non-mortgage loan-losses could rise,” said Ian Pollick, CIBC’s head of North American rate strategy, wrote in a note.

While a number of economists and strategists had been forecasting that the spread of the coronavirus could resemble the SARS outbreak in 2003, which led to a quick economic recovery, the outlook is now looking increasingly grim.

“Following the stock market crash of 1929, interest rates and inflation were very low but this did little to help equities, which produced dismal returns for several years. Until we have greater clarity on the economic ramifications of the coronavirus, we continue to suggest investors remain cautious, resisting the urge to buy on equity dips,” Ian de Verteuil, a strategist at CIBC World Markets, said in a note.

Government bonds continued to offer one of the few havens for investors, sending yields to new record lows as bond prices soar.

The yield on the 10-year U.S. Treasury bond fell as low as 0.318 per cent earlier in the day, before climbing to 0.551 per cent. At the start of the year, the yield was about 1.9 per cent.

Now, all U.S. government bonds across the yield curve, from 30-year bonds down to one-month notes, are yielding less than 1 per cent and reflecting dimming hopes for the global economy.

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