Shares shredded on Black Monday as oil price dives

A Monday meltdown wiped $150bn off the local stockmarket as collapsing oil prices and coronavirus threatened to trigger a global recession.

Trader Timothy Nick, left, and Michael Pistillo work the floor of the New York Stock Exchange. Picture: AP

A Monday meltdown wiped $150bn off the local stockmarket, the Australian dollar suffered a 5 per cent flash-crash and government bond yields hit record lows as collapsing crude oil prices and coronavirus threatened to trigger a global recession.

Australia’s S&P/ASX 200 share index dropped 455.6 points or 7.3 per cent — its biggest fall since October 2008 — the dollar briefly plunged to an 11-year low of US63.13c and Australia’s 10-year bond yield fell as much as 12 basis points to a record low of 0.5148 per cent.

The local bourse has plunged 19.6 per cent from a record high close of 7162.5 just over two weeks ago, putting it on the cusp of a “bear market”, defined as a fall of at least 20 per cent.

On top of a growing sense of panic and expectations of a global recession as coronavirus cases surged past 110,000 and Italy quarantined almost a quarter of its population over the weekend, crude oil prices plunged more than 30 per cent, threatening to trigger defaults on US junk bonds.

It came after Russia refused to agree to OPEC’s plan to cut production to offset the demand hit from the coronavirus and Saudi Arabia started a price war by offering unprecedented discounts to customers while threatening to boost production to a record 12 million barrels a day, according to Bloomberg.

“The shock-and-awe Saudi strategy will propel oil markets into a period of radical uncertainty,” said Stephen Innes, chief market strategist at AxiTrader.

“Russia baulking was one thing, but Saudi ramping up production is a bird of another feather.”

The local energy sector was devastated, with the ASX 200 energy index diving 20 per cent as Brent crude fell 31 per cent to $US31.02 a barrel and West Texas crude fell 34 per cent to $US27.34 a barrel, the biggest intraday falls in crude oil prices since the 1991 Gulf War. “It seems inevitable that US virus headcount numbers will climb substantially from current levels, possibly in an explosive way once testing is rolled out on a large scale,” Mr Innes added.

“The oil market could remain under pressure for the foreseeable future until maybe Russia and the Saudis walk back their new-world-order-for-oil threat.”

Oil Search dropped 35 per cent to $3.30 a share — making it the worst performing stock in the ASX 200 — while Santos dived 27 per cent to $4.89, Beach Energy plunged 19 per cent to $1.94, Woodside Petroleum fell 18 per cent to $21.54 and BHP lost a massive 14 per cent to $27.55. Banks plunged as record low interest rates threatened to shred their net interest margins.

CBA dived 6.5 per cent, while Westpac, NAB and ANZ dived 8.5 per cent to eight-year lows.

US 10-year Treasury bond yields dived 29 basis points to a record low of 0.4658 per cent amid expectations that the Fed will cut the fed funds rate by 75 basis points at its meeting next week.

In Asia, Japan’s Nikkei 225 fell 5.1 per cent, the Hang Seng dived 4.5 per cent, the Shanghai Composite lost 3.4 per cent and South Korea’s KOSPI dived 4.4 per cent.

European and UK markets suffered massive falls with the Euro Stoxx 50, the German DAX, the Paris CAC 40 and the FTSE 100 down more than 8 per cent in early European trading.

S&P 500 futures traded down by their limit of 5 per cent, pointing to a grim night on Wall Street.

With the benchmark ASX 200 index now trading within 1 per cent of his 5700 points “bear case” scenario — which in part assumes negative earnings per share growth and average valuation multiples — Morgan Stanley’s head of research Chris Nicol said the risk-reward was “skewed more positively” .

“However, the broader risks that lower oil brings to credit markets and other risk assets and yet-to-be quantified earnings pres­sures that COVID-19 impacts bring to (the) aggregate earnings outlooks keep us in a broad defensive stance.

“More tactically, screening for opportunity in value tilts, technical support, cyclicality and relative underperformance signals will be a useful first step to capture performance in any index bounce.”

Westpac chief economist Bill Evans slashed his forecasts for Australian economic growth to 1.6 per cent for the year and predicted a recession — defined as two consecutive quarters of negative economic growth — in the first half of 2020.

But he noted that the government was set to announce its policy response later in the week and it would be necessary to adjust his forecasts according to his assessment of the impact of the policies.

“Whereas exports will explain the major shocks in the March quarter given their exposure to the Chinese economy, the June quarter contraction will be dominated by Australia’s and the rest of the world’s exposure to the virus and the lagged effect of China’s recession in the March quarter,” Mr Evans said.

“In particular, the impact on the rest of the world has already been affecting financial markets, which is likely to puncture confidence more widely.”

Lucerne Investment Partners portfolio manager Jerome Lander said investors were about to experience a reckoning that sweeps away the pretence of “fake wealth and artificial economy”.

In a note to clients, he said investors were “reacting in horror to the reality of the coronavirus as it begins its exponential growth around the world”.

“This is a truly frightening pandemic with significant ramifications which much of the developed world is unlikely to cope with well,” Mr Lander said.

“Unlimited QE is likely but won’t help alter the destruction from the pandemic. These are truly dangerous times for all investors, but particularly for those holding large amounts of overvalued equity and property assets at fake economy prices.”