That is precisely what Saudi Arabia has effectively said to Russia on Friday, as the Russians refused to sign up for further OPEC+ price cuts. Over the weekend Saudi Arabia announced massive discounts on its crude prices, well below either the Russian or Brent benchmarks, despite Brent and WTI collapsing on Friday, and Saudi Aramco's (SE:2222) share price falling 9.0% yesterday in trading in Riyadh. Aramco closed at 29.95 riyals, below its 32.0 riyal IPO price.
But all bets are off will not apply only to oil markets today. Over the weekend, Italy has effectively restricted the movement and gathering of one-quarter of its population – 16 million people – in the North of the country. Taking a leaf out of the Chinese playbook may be no bad thing. It is unlikely to play well with European equity markets though when they open this morning, following another negative day on Friday on Wall Street.
China will make its contribution to the thunder clouds hanging over markets as Monday starts. On Saturday the combined January and February Balance of Trade was released, plunging to a deficit of $-7.1 billion. Imports only shrunk by 4%, but exports plunged by 17.2%, far worse than expected and highlighting the scale of the coronavirus-induced shutdown in industrial activity. Chinese officials put a brave face on the data, suggesting distortions by the Lunar New Year holidays. An excuse unlikely to wash with markets. China may slowly be returning to work, but manufacturers will now likely be facing an international fall in demand, with coronavirus now well-established outside of Chinese shores.
Bond yields continued tumbling in New York, as investors fled almost any other asset class and went into capital preservation mode, the U.S. 10-year and 30-year yields hitting record lows. U.S. 10-year yields hit 0.70% on Friday before recovering to 0.75% at the session's close. It is hard to believe that just two months ago they were just shy of 2.0%, but bond markets have been warning markets since the start of coronavirus, that the world faced challenges with its consequences. Cries will increase for yet another rate cut at the FOMC meeting next week, despite an out of sequence one at the start of the month. Although I believe its effect would be minimal, as I have explained ad nauseum, markets may have the Fed’s ear and next week’s meeting will be live.
Price action this morning at the market open has been one of panic. Oil futures dropped over 30% at the start of trading, with Brent crude futures touching $30.0 a barrel before climbing back to $35.0 a barrel, still 22.0% lower than Friday's close. S&P e-mini futures fell 4.0% on the open, and both the haven Japanese yen and Swiss franc have rallied already.
I am always suspicious of significant market moves during the low liquidity twilight zone that is the Monday morning open in Asia. More often than not, it is the wrong move and usually has reversed entirely by the European open. But not always. Every now and then, Asia gets it right. Today may be one of those days.
On the data-front, any releases over the next 24-hours are likely to be drowned out by the noise of the coronavirus spread and the drop in the price of oil. The world has been ill-equipped to deal with one deflationary shock in the form of coronavirus. A double knuckle shock from both coronavirus and a disorderly collapse in oil prices, will have central banks on red alert. Global financial markets will expect nothing less now than fiscal and monetary stimulus across the globe. They will punish any hold-outs and ostriches in ivory towers with heads in the sand.
Equities
The S&P e-mini futures have fallen by 3.5% already in the first hour of trading, and point to a grim start for Asia equities following the collapse of oil prices this morning. The only silver lining will be that China, South Korea and Japan are all huge net oil importers. That will likely be only a cold comfort; with both Japan and South Korea in particular, having limited room to manoeuvre on the monetary policy front.
Indonesia and Malaysia will be in the firing line as regional oil producers, with Singapore’s huge petrochemical industry likely to be unloved today as well. Resource-centric Australia is also expected to feel the brunt of oil’s carnage this morning, as natural gas prices follow oil to the seafloor and fears of a double deflationary shocks flow into commodity prices.
The only winner on the day is likely to be India, A huge net energy importer grappling with current account issues, a banking crisis and stagflation pressures (falling growth and rising prices). Today’s oil price collapse will be a welcome shot in the arm for the beleaguered Reserve Bank of India.
Currencies
The U.S. dollar has collapsed in the first hour of official trading in Asia as both oil and stock futures plunged on the futures opening. Already on the back foot on Friday, the noise for another 50 basis rate cut by the Federal Reserve next week has to reach ear-bleeding levels in Asia this morning.
EUR/USD has jumped 0.85% to 1.1385, just shy of resistance at 1.1410. USD/JPY gapped through 105.00, falling by 1.40% to 103.80 with no technical support of note until the 101.00 regions. USD/CHF gapped lower 50 points lower from its 0.9375 close and has continued falling, down 1.10% to 0.9275, a one-year low, boosted by haven flows.
Ominously, both the Australian and New Zealand dollars are both lower despite the U.S. dollar carnage elsewhere. The AUD/USD and NZD/USD both falling 0.50% to 0.6620 and 0.6320, respectively. Their use as China proxies suggests that both the offshore and onshore Chinese yuan are in for a tough day at the office today.
Today’s initial price action by the U.S. dollar, and the collapse in oil and stock prices this morning, implies the regional Asian currencies will start the day in the red and remain under pressure. We expect to see a continuing rotation out of emerging markets, and into the safety of Swiss francs and Japanese yen throughout the day.
Oil
Saudi Arabia’s initiation of an oil price war, and Saudi Aramco’s subsequent share price collapse on Saturday, saw Brent and WTI futures gaps 35% lower on their Asian open. Brent crude touching $30.00 a barrel before rallying back to $36.00 a barrel.
There is no doubt that computer-driven selling and margin closeouts also drove the rout this morning and that initial wave of selling seems to have passed for now. Brent crude futures are currently down 20.50% at $36.00 a barrel, and WTI is down 20.65% at $ 32.85 a barrel.
Just as Russia seems intent on causing mischievous mayhem and punishing the U.S. shale sector, Saudi Arabia seems intent on punishing Russia. Oil prices, therefore, will likely be capped over the next few months as coronavirus stalls economic growth, and Saudi Arabia opens the pumps and offers huge discounts on its crude grades. US Shale and Canadian tar sands are in for a nightmarish year, I fear. Production becoming a battle of who has the deepest pockets.
For today, however, we may have seen the worst of the oil sell-off in the near-term. Early Monday morning moves are want to overextend, due to weak liquidity. That said, any rallies from here are likely to be met with walls of sellers, and it is hard to envision Brent crude back above $40.00 a barrel in the next few months.
Gold
Gold has benefitted from the bonfire of vanities elsewhere, with early session haven flows pushing it higher through $1700.00 an ounce, rising 1.60% to $1701.00 an ounce. In comparison with the scale of the moves seen elsewhere, golds ascent has been relatively orderly and modest.
Gold’s hold on the $1700.00 an ounce level looks tenuous for now, and we wouldn’t be surprised if it retreats slightly from these levels with stop-loss buying not noticeable at these heights. That said any drift lower to $1695.00 an ounce is likely to be met with plenty of willing buyers.
Deflationary shocks are not precisely bread and butter for gold, but haven positioning, falling interest rates and a weaker U.S. dollar are. I would expect gold to continue its orderly climb as the week continues. A daily close above $1700.00 an ounce is followed by technical resistance at $1750.00 and $1800.00 an ounce. For today in Asia, though, $1690.00 to $1705.00 will more than likely cover the balance of the Asia session.