Trillions vaporise from world economy

LONDON: Shares around the world are facing their worst day since the financial crisis with the dramatic falls leading to the day being dubbed "Black Monday". While oil prices recorded their biggest one-day crash since the first Gulf War in 1991, tumbling as traders bet that a clash between oil giants Saudi Arabia and Russia could flood a world already hobbled by the coronavirus outbreak with a glut of crude.

Saudi Arabian state oil giant Aramco’s move over the weekend to cut most of its official selling prices triggered the oil-price crash, with a barrel of Brent crude, the global gauge of prices, closing down 24% at $34.36 (Rs5,343).

London's index of top shares ended the day almost 8% lower, with some £125 billion (Rs25,576) wiped off the value of major UK firms.

Similar falls took place across the US, Europe and Asia as a row between Russia and Saudi Arabia saw oil prices plunge. Shares were already reeling from fears of the impact of the coronavirus as cases globally continue to rise. Analysts described the market reaction as "utter carnage".

In the US, the major stock indexes fell so sharply at the start of trading, that the buying and selling of shares was halted for 15 minutes, as a so called "circuit breaker" aimed at curbing panicky selling came into effect. The Dow Jones industrial average fell more than 2,000 points, the biggest ever fall in intraday trading.

The dramatic drops were triggered by a row between Saudi Arabia and Russia over oil output. Saudi said it would slash prices and pump more oil, sparking fears of a price war. The price of international oil benchmark Brent fell almost a third in its biggest drop since the Gulf War in 1991 before recovering slightly to trade 20% lower. "There is panic setting in the market right now," said Andrew Lo, professor of finance at MIT's Sloan School of Management. "Things are going to get worse before they get better." "It’s going to be a very difficult set of market conditions for people to navigate through over the next few months. One has to have a strong stomach," he added.

Falls on the Dow Jones index of major companies were led by oil firms Chevron and Exxon Mobil, which fell more than 7%. On the Nasdaq Composite, hard drive maker Western Digital

fell 11% and Tesla 10% Oil firms Apache and Marathon oil led the S&P 500 index down, dropping 40% apiece.

The UK and US falls, were mirrored by similar falls in Europe, with the main stock market indexes in France, Germany and Spain all closing over 7% lower. "It shows a level of nervousness in the market which I haven't seen in a long time," said Justin Urquhart-Stewart, co-founder of Seven Investment Management.

Investors are selling stocks at such a rate because they cannot quantify what Saudi Arabia and Russia might do, he said.

In the UK:

§ Oil firms saw the biggest drops, with shares in Shell and BP down by about 15%, while Premier Oil saw its shares more than halve in value

§ In Frankfurt, Deutsche Bank led the declines, falling 12%, followed by Mercedes-Benz maker Daimler, down 10%

§ Similarly in Paris, banks such as Crédit Agricole and Société Générale fell 10%

§ The Russian rouble fell over 8%, on track for its worst one-day drop since December 2014

Elsewhere on the markets, the price of gold hit a seven-year high, trading at $1,700 per ounce. Gold is often seen as a desirable asset to hold in times of uncertainty.

And in a historic moment, the price on benchmark UK government bonds for two-, three-, four-, six- and seven-year maturities rose so high that yields - or the rate of return on the bond - briefly turned negative for the first time. A negative yield means investors will lose money from holding the bond.

Earlier on Monday, Asian stock markets had also fallen sharply, with Japan's Nikkei 225 index down 5% while Australia's ASX 200 slumped 7.3% - its biggest daily drop since 2008.

In China, the benchmark Shanghai Composite fell 3%, while in Hong Kong, the Hang Seng index sank 4.2%.

The price of oil had already fallen sharply this year as the coronavirus began to spread internationally, with demand for fuel expected to decline.

Last week, oil exporters' group Opec - which includes Saudi Arabia - agreed to cut production in order to support prices.

However, it also wanted non-Opec oil producers such as Russia to agree to cuts, and on Friday Russia rejected the plans.

In response, Saudi Arabia has cut its official selling prices for oil and plans to increase production. The move is seen as Saudi Arabia flexing its muscles in the oil market to make Russia fall into line.

The price of crude oil is about half the level it hit in early January. The root cause of that is the coronavirus. It has hit demand for oil and some of the big exporters have been trying to stabilise its price.

Last week a group of them discussed production cuts. But the biggest producer among them, Russia refused and the oil price fell further.

Then at the weekend, Saudi Arabia, the biggest of the producers that were pressing Russia to agree output cuts, announced it would increase supplies and offered discounts to its buyers. That sent the oil price into freefall.

That in turn undermined stock markets, although it wasn't the only factor. The lower oil price is a problem for the credit markets. Many American shale producers are likely to be unviable and they have borrowed in the high risk debt market, issuing what are called junk bonds. So there is the potential for losses for investors who hold those bonds.

Cheaper oil is obviously a benefit for users. Airlines have been hit by a decline in bookings, but cheaper fuel will offset that a little. And in time, there will be an impact on the price that motorists pay, although in many countries, including Britain, tax accounts for most of what they pay.

Our correspondents adds from Karachi: The capital market suffered massive declines of 3.04 per cent on Monday as taking cue from regional markets, local and foreign investors resorted to selling after Saudi Arabia started its price war sending oil prices crashing by more than a fifth, dealers said.

"Since the global stock markets including local bourses witnessed massive fall as the investors consolidated their funds," Khurram Schezad, co-founder and executive director, baseH Technologies (Pvt) Limited, said while explaining rupee depreciation. He said that due to uncertainty in global markets, funds from local debt markets would also flow out. He, however, said there was no need to panic if an amount of around $200 million was taken out of the debt market.

Foreign investors participated in local debt market aggressively since July 2019 due to attractive rate of returns. The foreign investment made in Market Treasury Bills and Pakistan Investment Bonds stood around $3.5 billion dollars during July 1, 2019 and March 6, 2020.

International oil prices dropped by more than 30 per cent as OPEC failed to strike a deal with its allies regarding production cuts. Saudi Arabia has slashed its prices as it is reportedly getting ready to ramp up production, leading to fears of an all-out price war.

Analysts at Topline Securities believed lower oil prices were a net positive for Pakistan's macros (especially the external account), as 26 per cent of Pakistan's imports were oil price driven. They estimated, on an annual basis, $20/bbl lower oil prices would reduce Pakistan's oil import bill by 26 per cent or $3.8-4.2 billion. However, on the other hand, the analysts estimated a cumulative reduction in exports and remittances by around $1-2 billion. Hence, on a net basis, Pakistan's external account could potentially improve by $2.2-2.8 billion (around 50 per cent of Pakistan's Current Account Deficit) due to $20/bbl lower oil prices. They also believed rupee/dollar to remain stable in the near-term.

World oil prices crashed on Monday, fuelling a vicious selloff on stock markets which were already buckling under from the spreading coronavirus outbreak.

"The markets have passed from panic mode into pure hysteria," said Ayush Ansal, chief investment officer at trading firm Crimson Black Capital. "Markets were at breaking point before Saudi Arabia´s decision to launch an oil price war but this latest development has taken them beyond that."

OPEC kingpin Saudi Arabia last week wanted Russia to join the cartel in deep production cuts after world oil prices slumped on forecasts of plunging demand because of COVID-19. However, Moscow declined, triggering Riyadh´s move to preserve market share and sideline its close competitor, thereby creating fresh market chaos.

"The war against the coronavirus is turning into a war for oil export markets," said analyst Tamas Varga at oil broker PVM Associates. The dizzying oil drop the steepest since the 1991 Gulf War sent investors fleeing for safety alongside mounting fears over the worsening coronavirus which has seen Italy lock down a swathe of its north.