Canada’s main stock index fell on Monday by the most since Black Monday in 1987 and the loonie hit a near-three-year low as a plunge in oil prices rattled investors, with pressure rising on the Bank of Canada to cut interest rates further.
The Toronto Stock Exchange Composite Index, which has a 15 per cent weighting in energy stocks, closed down 10.3 per cent, its biggest drop since the October 1987 stock market crash, as Saudi Arabia and Russia signaled they would compete on price rather cut output further.
The price of oil, one of Canada’s major exports, fell as much as 34 per cent to its lowest level since February 2016, at $27.34 a barrel.
“Canadian assets are getting hit pretty hard because we are seeing a major crash in the oil price,” said Colin Cieszynski, chief market strategist at SIA Wealth Management.
“We are into this phase of the market where it looks like people are selling everything. Pull-the-rip-cord-and-get-me-out-of-here kind of trading.”
The TSX sell-off came as stocks globally were pummeled by fears the coronavirus outbreak would trigger a recession.
The energy sector on the Toronto Stock Exchange tumbled by 27.2 per cent, with Cenovus Energy Inc down more than 50 per cent, while the Canadian dollar slumped to its weakest intraday level since May 2017 at 1.3760 to the U.S. dollar.
“Crazy moves in USD-CAD over the last 24 hours,” said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York. “The plunge in the price of oil adds tremendous pressure on the BoC and on the Fed to cut further.”
Last week, both the Bank of Canada and the Federal Reserve slashed their key interest rates by 50 basis points. Should the sell-off in oil continue, they could decide to ease again without waiting for a policy meeting.
“Probably central banks would like to wait a few days, see where that (oil) settles, and it will depend entirely on market dynamics whether they have the luxury of waiting a few days to see where it settles,” Anderson said.
Money markets expect a further 50 basis points of easing from the Bank of Canada by June, which would leave its benchmark rate at just 0.75 per cent.
Bond investors are counting on further easing, with the 10-year yield hitting a record low of 0.233 per cent. It was last down 19.1 basis points at 0.537 per cent.
Wall Street also took a nose-dive on Monday as recession worries loomed large while tumbling oil prices and ongoing coronavirus fears prompted investor panic on the anniversary of the U.S. stock market’s longest-ever bull run.
The Dow Jones Industrial Average fell 2,013.45 points, or 7.78 per cent, to 23,851.33, the S&P 500 lost 225.81 points, or 7.60 per cent, to 2,746.56 and the Nasdaq Composite dropped 624.94 points, or 7.29 per cent, to 7,950.68.
A benchmark pan-Europe index entered bear market territory and a 7 per cent slide in the S&P 500 at the open on Wall Street triggered a circuit-breaker put in place after the financial crisis a decade ago, halting U.S. stock trading for 15 minutes.
The yield on the 10-year U.S. Treasury note slid as low as 0.318 per cent - a level unthinkable just a week ago - and German government debt yields set record lows as investors rushed to cut risk assets and snap up safe-havens. Gold briefly topped $1,700 an ounce for the first time since 2012 and is up more than 10 per cent so far this year.
The rout’s depth, sparked after Saudi Arabia stunned markets on Sunday with plans to hike oil production sharply following the collapse of the Organization of the Petroleum Exporting Countries’ supply-cut agreement with Russia, unnerved investors.
“The oil price plunge adds a huge disruptive dynamic to markets that are already very fragile,” said Paul O’Connor, multi-asset head at Janus Henderson in London.
“We are seeing this week, finally, a full-scale liquidation and signs of capitulation, full-scale panic - we see this in every asset,” O’Connor said.
Jim Vogel, interest rate strategist at FHN Financial in Memphis, Tennessee, said that “nobody thought that Saudi Arabia would start a price war. Suddenly you have to re-evaluate what else could impact this.”
Saudi Arabia’s grab for market share was reminiscent of a drive in 2014 that sent prices down by about two-thirds, while the renewed plunge on Wall Street came exactly 11 years after U.S. stocks touched bottom during the financial crisis.
Brent and U.S. crude futures slid $14 a barrel to as low as $31.02 and $27.34 in volatile trade.
Both crude benchmarks recouped some losses but still fell almost 25 per cent in their biggest daily drop since 1991, the start of the first Gulf War.
Brent fell $10.91 to settle at $34.36 a barrel, while U.S. crude settled down $10.15 at $31.13 a barrel.
The Dow fell a record 2,000 points when trading opened and the S&P 500 was poised for its largest single-day percentage drop since December 2008, the depths of the financial crisis.
The benchmark index was almost 19 per cent below its all-time high of Feb 19 - just 1 percentage point shy of bear territory.
Equity markets in Frankfurt and Paris tumbled about 8.5 per cent and London tanked 11 per cent. Italy’s main index slumped 14.3 per cent after the government over the weekend ordered a lockdown of large parts of the north of the country, including the financial capital, Milan.
The pan-regional STOXX 600 fell into bear market territory from an all-time high in February. Oil stocks bore the brunt of losses, with energy giants BP 19.5 per cent lower and Royal Dutch Shell off 18.2 per cent.
The energy sector in Europe was at lowest since 1997.
The losses in Europe followed sharp declines in Asia. MSCI’s broadest index of Asia-Pacific shares ex-Japan lost 4.4 per cent in its worst day since August 2015 and Japan’s Nikkei dropped 5.1 per cent. Australia’s commodity-heavy market closed down 7.3 per cent, its biggest daily fall since 2008.
Investors piled into safe-haven debt, driving the 30-year U.S. Treasury yield below 1 per cent on bets that the Federal Reserve will cut interest rates by at least 75 basis points when policy-makers meet next week.
The Fed last week cut rates by half a percentage point after an emergency meeting.
Katie Nixon, chief investment officer at Northern Trust Wealth Management in Chicago, said people know the turbulence will pass as in past crises and that ultimately, markets recover, but emotions can overcome rational behavior.
“Our hearts, however, tell us to, ‘Do something!’ The sense of market chaos feeds into our most damaging behavioral biases,” Nixon said in a note to high net-worth clients.
The number of people worldwide infected with the coronavirus rose above 111,600, and 3,800 have died from the virus.
There were mounting worries that U.S. oil producers carrying a lot of debt would be made uneconomic by the price drop.
The mood was also hit by North Korea’s firing three projectiles off its eastern coast.
The European Central Bank meets on Thursday and will be under intense pressure to act, but rates are already deeply negative.
The 10-year Bund yield - the euro zone’s leading safe asset - fell to a record low of -0.906 per cent, while inflation expectations for the euro zone sank below 1 per cent for the first time.
Data suggested the global economy toppled into recession this quarter. Figures from China over the weekend showed exports fell 17.2 per cent in January-February from a year earlier.
The fall in U.S. yields and Fed rate expectations pushed the dollar to its largest weekly loss in four years before it recovered some ground..
The dollar extended its slide to 101.20 yen, depths not seen since late 2016. It was last down 3.1 per cent at 102.07.
The euro shot to the highest in over 13 months at $1.1492 and was last at $1.1431.
Gold retreated from the $1,700 level it briefly touched as investors sold bullion to cover margin calls in plummeting securities, overshadowing the metal’s safe-haven status.
U.S. gold futures settled up 0.2 per cent at 1,675.70 an ounce.