World’s epic $1 trillion meltdown
Coronavirus has hit global markets hard, with record drops on Wall Street. Then Monday happened and things went into free-fall. There are two main factors which have sent shudders through global markets.
Stock markets and investors were reeling over the weekend, licking their wounds following the worst week of trading since the Global Financial Crisis.
Monday's open of trade was already set to be a bruising encounter until Saudi Arabia broke away from its commitment with the Organisation of the Petroleum Exporting Countries by slashing export oil prices over the weekend.
That move caused a major industry upheaval by invoking fears of a destructive price war with Russia, sending the price of crude oil spiralling up to 30 per cent lower and inflicting losses to global share markets not seen for more than a decade.
Both Saudi Arabia and Russia have had to limit production as part of OPEC rules to control global prices, but the outbreak of the deadly coronavirus has reduced demand and put the squeeze on oil producers.
Moscow refused to join OPEC in cutting production in fear of losing ground to US shale companies which have emerged as major players in global oil markets over the last decade.
In response, Saudi Arabia tore up its agreement and slashed the price of its oil in an attempt to undercut competitors.
"The oil price is now central to everything," Pepperstone head of research Chris Weston told news.com.au.
"Obviously we've got our eyes on what's happening with the coronavirus and the intensity of the outbreak, but the oil price is a new thing that whacked the market and made the downturn a financial contagious story akin to what we saw during the GFC.
"All markets are going to take their cue from the oil market now because so much investment is tied to the oil price."
The Bloomberg commodity index is its lowest since July 1986, and close to its low since inception. pic.twitter.com/xwECK9Caag— John Authers (@johnauthers) March 9, 2020
The Middle East country cut the price by up to $8 a barrel, immediately slicing value off both US and Brent Crude.
"It doesn't sound like a lot, but it's unprecedented," Mr Weston said.
"They haven't cut by that much in about 20-odd years, that was a real show that the country that has really been the glue behind this whole project has decided to break away and start, what a lot of people saw, an all-out price war."
The medium and smaller companies operating shale oil operations in the US were already facing a challenging period due to the reduction in demand as the dramatic drop in value tested the credit limits of many, questioning the financial viability of the industry.
IG market analyst Kyle Rodda said the call from Saudi Arabia was the final straw for global markets as investors teetered on the edge of all-out panic selling.
The ASX200 lost $A147 billion on Monday, the FTSE in the UK fell nearly $A250 billion and five tech companies alone in the US plunged just shy of $A490 billion. These losses amount to $900 billion and when the falls in Europe and Asia are factored in, the cost would be well in excess of a trillion dollars.
Opening bell on Wall Street..... pic.twitter.com/R7rXlkmQTN— Nick Bryant (@NickBryantNY) March 9, 2020
"At the moment, everything that could go wrong is going wrong," Mr Rodda said.
"We're seeing massive macroeconomic headwinds emerging from the coronavirus and the fundamental landscape shifted with what happened in oil markets (on Monday morning).
"Growth was already looking like it is was going to take a pretty considerably hit globally because of the coronavirus outbreak and now we're seeing financial conditions deteriorate significantly because of what is looking like a prolonged price war."
COULD PRICE WAR LEAD TO NEW ARAB SPRING?
The daring price slash and breakaway from OPEC has the potential to unsettle the balance of power in the Middle East.
Some commentators have speculated the move from Saudi Arabia could be a geopolitical dagger aimed at its bitter rival Iran.
But according to Dr Stephen Kirchner, the director of the trade and investment program at the United States Studies Centre, regardless of the intention of the move the continual slide in crude prices is problematic for leaders in the Middle East.
"The governments of that region are very heavily dependent on oil revenue so this will add to their economic problems on top of the coronavirus," he told news.com.au.
"And that economic instability could potentially spill over into political instability.
"Those underlying tensions have always been there but when you have shocks like this those tensions seem to manifest."
Dr Kirchner didn't rule out the possibility of uprisings similar to the Arab Spring of the early 2010s.
"That's always been an underlying concern with Saudi Arabia, in many ways it's a fragile political and economic system and if you have two shocks hitting at the same time - an oil price shock and the disruptions associated with the coronavirus - then that could be enough to push the regime over the edge," he said.
The threat extends to its neighbouring government based in Tehran, according to the academic, which has had its legitimacy exposed during the outbreak of the new coronavirus.
"Iran is a greater risk of that instability than Saudi Arabia, there was already quite a bit of unrest in Iran before this happened," Dr Kirchner said.