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9 Mar, 2020 08:09

Waking up to a new reality: What’s going on with stocks & oil?

Waking up to a new reality: What’s going on with stocks & oil?

As the new week begins, you might be surprised to see all the major stock markets down and oil recording its worst losses in nearly two decades. Here is what happened overnight.

What happened to the markets?

Oil prices crashed as much as 30 percent as trading began in Asia on Monday morning, with futures for benchmark Brent suffering the biggest drop since the Gulf War in 1991. As of 06:34 GMT, Brent was as low as $33.31 per barrel, while West Texas Intermediate (WTI) was trading at $29.72, with both down nearly 50 percent year to date.

A nosedive in crude prices triggered a panic sell-off in major stock markets, which were already shaken by the coronavirus outbreak. All key Asian indices lost between 2.5 percent and more than five percent, with the Nikkei suffering the biggest drop. In India, the Mumbai Sensex slipped over 1,500 points or nearly 4.2 percent, while the broader NSE Nifty was down 3.9 percent.

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European investor sentiment was also skittish, adding to last week's losses, with futures on the UK FTSE 100 sliding more than seven percent and other main equity indices set to open down.  

After a rollercoaster week, US stock futures also tumbled, with the Dow Jones Industrial Average set to plummet around 1,000 points when trading starts on Monday. The S&P 500 futures and Nasdaq-100 futures are also expected to suffer significant losses.

Why did it happen?

The catastrophic situation in the oil market occurred as major producers failed to agree on new output cuts at the end of last week, as Russia refused to back deeper reductions and suggested prolonging the existing ones. With no new steps agreed on, the current deal expires on April 1, freeing all the parties of the accord to open the taps and extending the supply glut, while one of the main importers of oil, China, is still battling with the coronavirus outbreak.

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Russia’s refusal to support additional cuts apparently angered Saudi Arabia, which has been pushing the measure. The kingdom announced that it would slash prices for its buyers and is expected to boost production by as much of as 2 million barrels per day.

What's next?

The shocking start to the week has already triggered fears that we are going to see a Lehman Brothers moment. The looming oil war – which some say has already started –would be another blow to the global economy, which has been under pressure from the Covid-19 outbreak.

Speaking before the oil markets were hit, some analysts had already said the impact of the coronavirus could be underestimated – and that instead of causing something like the 2008 financial crisis, it could lead to the lowest global growth performance since 2001, or worse. However, they also noted that markets can overreact.

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“Financial markets, in particular stock exchanges, tend to view uncertainty more negatively than bad news. For that reason, they almost always overestimate the impact of bad news and correct that overshot as the facts surrounding a situation become clearer,” Peter C. Earle, research fellow at the American Institute for Economic Research, previously told RT.

“As the full extent of the global demand slowdown becomes clearer, markets will settle down but also factor in (although not fully) the pessimistic outlook,” wrote Sourabh Gupta, senior fellow at the Institute for China-America Studies.

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