The financial markets are having the worst performance since the 2008 financial crisis. The S&P has the worst performance in a decade and now it is already down 5 percent. The Europe 600 index has dropped by 5.9 percent while the MSCI Asia Pacific Index sank by 4.1 percent. This is even worse than the 2010 flash crash because we never had such a big drop and the question is what will happen next to the stock market. Will we see a bounce or will the markets continue plummeting.
Last week has been dramatic because Saudi Arabia has decided to flood the market with cheap oil in attempt to crush their competitors in the global oil market. This has lead to disagreements in the Organization of Petroleum Exporting Countries (OPEC) and the market has reacted in a very aggressive way. The price of oil has fallen by 30 percent to a 5 year low. The Brent oil has fallen to $33 and Bloomberg has called this the “one of the most dramatic bouts of selling ever”. This has turned out to be the biggest fall in oil prices in history within one day. The OPEC has failed to reach an output agreement deal and there is a potential that this group lead by Russia and Saudi Arabia will collapse because of these disagreements. Russia is refusing to bend to Saudi Arabia’s wish for a further reduction in 2.1 million barrels in terms of output per day. This will not continue past the end of this month and this will allow them to pump as much oil as they wish. It already looks like the oil market crash has already begun in the midst of stock market crash and the uncontrolled production will make the oil prices drop further.
The US oil companies will suffer the most from this sell-off in the oil market. Many of these companies have been taking loans to drill American oil with an aim of selling to the international market. With the current low prices, drilling costs are too high and this makes their operations hard. It will not be a wonder if some of these companies file for bankruptcy or shut down some of their operations. Shares across the oil exploration and production sector have fallen to almost the all time lows. This is because of the decline in oil prices that will ultimately reduce the revenue of these companies. They also have high debt levels and investor’s sentiment remains poor because everyone fears that the current stock market crash will become even worse.
The future partnership between the Organization of Petroleum exporting Countries (OPEC) remains uncertain. On top of this, we have global economic fallout and with the stock market crushing, the volatility of the US oil has skyrocketed to the highest level in five years. Gold and other commodities have also been affected by this collapse of oil prices. Fund managers who have incurred losses from oil will have to liquidate some of their positions on gold as a way of covering the losses.
This price war in crude market by major oil producing nations has affected all financial markets and this is causing wild moves in many markets. Some of the exchange traded funds that tracks the US markets have posted big declines and at the same time the United States 10-year treasury yields have fallen to 0.5 percent. The 30 years treasury bonds have also tanked to 0.9 percent. Because of this, the United States yield curve is below 1 percent for the first time in history. This yield curve points out that the US economy is experiencing a historic slowdown and it might be a matter of time before we find ourselves in the middle of an economic collapse.
Also the European 600 index has fallen to historic lows for the first time since 2016. Everything looks bearish and economists are predicting that the Euro index will continue plummeting just like the US indexes. Indexes that track economic performance in other geographical regions are also in the bear territory. Exchange rates also have seen sharp moves and traders are struggling to estimate where the trading ranges will be because the market is too volatile. The Japanese yen went up by 3 percent against the dollar while the Swiss franc and the Euro also strengthened by over 1 percent. The spread between Italy’s 10-year yield and Germany’s jumped up for 33 basis points to 211 points-the highest since August.
If this crush in oil price continues, many countries will have political and economic challenges. Oil exporters will experience a decline in GDP and many central banks will be in a pressure to avert an economic meltdown. The market is too volatile and Asian countries like Japan and South Korea are sounding an alarm because of this rapid movement in prices of various assets. “You just don’t know which way things are going to go, it makes it very hard to price anything right now,” said Sarah Hunter, chief economist for BIS Oxford Economics, on Bloomberg TV. “We’re seeing that in the market with the wild oscillations that are coming through.”
The markets are too erratic and right now Wall Street is a dangerous gambling casino while the Main Street remains buried into debt. The United States economy continues to perform poorly and what is happening with the stock market now implies that an economic collapse is here with us. Right now the American economy is extremely vulnerable because hundreds of companies are under performing and their stocks have been overvalued. This decline in performance is due to the current disruption of the global supply chains. In the last two months, the global supply chains have been freezing up and this has reduced global trade. As a result, companies have experienced a drop in cash flow and income. This is happening when most companies have huge debts just like the American economy which is debt driven. Because of this a big financial crisis lies ahead of us and it has already begun biting in the stock and oil markets.
All investors are pulling their money out of the stock market because of this panic because everyone fears that the stock market will collapse. The rates are soaring and the ultra bond futures are up while the 10-year yields are almost hitting a record low of 0.5 percent. The Germany’s 10-year yield has also decreased by a whopping 14 basis points to a return of 10.85 percent. The Japanese 10-years yield has also dropped by four basis points to -0.163 percent. It is very clear that the global economy is slowing down very fast and on top of this, the imminent collapse of the financial markets is threatening the stability of the global economy. Everything looks loose now and the global economy is in the verge of a collapse.
Right now the markets are very turbulent and to stabilize the markets, the Federal Reserve will not only need to cut interest rates further, but they will also have to start a new series of quantitative easing. The current struggle in the stock market will continue until when the policy makers will get ahead of the curve and initiate a new quantitative easing and further reduction in interest rates. If the Federal Reserve will not act on time, we might find ourselves in another great depression
Right now we are at a year of reckoning where all bubbles are bursting. We have already accumulated the highest amount of debt in history both in the private and the public sector to a point where we have a staggering $75 trillion in total. This debt is about five times compared to what we had a few decades ago.
The economy is now turbulent and it has reached a point where the Federal Reserve will not manage to keep pushing an economic collapse forward. This is the year of when economic and political fantasies will be rubbished because we have a bubble that has already begun bursting. The United States economy has been fueled by debt for years but we are at a point where this is unsustainable regardless of the efforts that the FED is making to prevent a collapse. The stock market is already plummeting and wealth worth billions is being lost every day.
The joy ride we have had in the stock market for the last 20 years is coming to an end and the stock market will collapse as never seen before. The oil market also remains uncertain and there is a very high likelihood that the prices will continue falling. Investors in the energy market will lose a lot because this will make some oil companies go bankrupt especially those that had taken huge debts to finance their operations. The fallout in oil prices means that other global markets too will be shaken. Considering the fact that the stock market is having is also plummeting, a combination of these two events is threatening the entire global economy. A global economic meltdown has already begun and the stock market is already crashing very fast. Unless the Federal Reserve comes up with a lasting alternative, the whole economy will collapse and we will find ourselves in an economic meltdown that will make the 2008 financial crisis look like nothing!