Last week’s volatility is set to continue into this one, with both the Dow Jones Industrial Average and oil futures plummeting over the weekend. Markets around the world are selling off to start the week.
US Market Crash Triggers ‘Circuit Breakers’
The S&P 500 opened with a 7% drop, triggering the market’s circuit breaker for the first time since its implementation in 2010. The circuit breaker causes markets to close temporarily if they drop too fast in a single day. Markets will reopen 15 minutes after the drop, and will close for the rest of the day if the index falls 20% after reopening.
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The crash signals a likely end to the market’s long, bullish run, as the global risks, driven largely by coronavirus becoming a pandemic, outweigh any rosy projections for the months ahead.
In response to the crisis, President Trump signed an $8.3 billion spending packing package to help the nation prepare to face the virus’ arrival to the US. On the economic front, the Fed has cut interests rates and will likely do so again this month as an emergency measures. Central banks around the world are pouring liquidity into their economies to soften the blow of the sudden economic downturn, though with interest rates already near 0% for most banks, there aren’t a lot of monetary policy options to ease the pain in the months ahead.
Saudi Arabia’s Big Bet
Texas Brent Crude dropped to nearly $28 per barrel this week, driven by both a demand crunch led by the coronavirus and Saudi Arabia’s decision to slash oil prices. The move is seen as an attempt to pressure Russia to join the Organization of Petroleum-Exporting Countries (OPEC) in cutting oil production. Saudi Arabia is now increasing oil production by over 10 million barrels per day, amid falling demand due to the coronavirus outbreak, which is now beginning to spread locally around the world. China’s demand for oil will fall heavily in the first quarter due to the virus.
Saudi Arabia’s decision to increase production at such a time is a bold one, and will have a major impact on its fellow OPEC members whose economies rely on the resource, as well as more developed oil exporters such as the United States. Nations like Venezuela, which are already struggling with a major economic crisis at home, will see state revenues and GDP fall even farther as they struggle to compete with Saudi Arabia’s low-cost oil production.
For the United States, the dramatic drop in the price of oil will make production unprofitable for virtually all American producers, as techniques like shale, fracking, and offshore drilling are more expensive than for Saudi Arabia, one of the lowest-cost producers in the world. The impact on the energy sector, from jobs to energy stocks, will be dramatic if prices stay at this level.
The move is a risky one. Saudi Arabia is not only reducing the price of a commodity it greatly depends on, but is also putting a major squeeze on some of its closest partners and most bitter enemies.