Canadian stocks took a historic hammering Monday after global crude prices collapsed and the spread of the new coronavirus continued to threaten the global economy.
The S&P/TSX Composite Index lost about 10.3 per cent of its value, or more than 1,660 points, in what was the biggest single-day decline since 1987. Canada’s main stock index finished Monday at 14,514.24, a 14-month low.
The suddenness with which stocks fell to start the trading day even triggered so-called circuit breakers, which briefly halted trading on the TSX. In the end, the only stock in the S&P/TSX index that finished Monday in the green was Dollarama Inc., the Montreal-based discount retailer.
Investors didn’t fare much better with stocks in the United States, where circuit breakers were also tripped soon after the opening bell sounded.
The blue-chip Dow Jones Industrial Average ended up shedding more than 2,000 points, or about 7.8 per cent, finishing the day at 23,851.02. The S&P 500, meanwhile, closed at 2,746.56, 7.6 per cent lower, after losing more than 225 points.
Monday’s equity meltdown appeared to be prompted by anxieties about the ongoing coronavirus outbreak and by a swift swoon in oil prices.
“It’s hard to find a bull case,” said Barry Schwartz, chief investment officer at Toronto-based Baskin Wealth Management. “It’s shocking, because two weeks ago it was impossible to find a bear case. We’ve just totally turned on a dime.”
There have now been more than 109,000 confirmed cases and 3,800 deaths linked to COVID-19, according to the World Health Organization, with the outbreak directly affecting companies in sectors such as airlines and hospitality. The virus has also raised concerns about disrupted supply chains and prompted talk of governments injecting fiscal stimulus into their economies, potentially via tax breaks or infrastructure spending.
Another side-effect of the outbreak has been a drop in expected demand for oil, which has put pressure on crude prices. Those prices dropped even lower recently following a failed attempt by the Organization of the Petroleum Exporting Countries to strike a deal with Russia for new production cuts. The decline then accelerated further after Saudi Arabia then decided to slash the cost of its crude, sparking a price war in global energy markets.
The Brent and WTI benchmarks for oil have now fallen into the range of US$30 to US$35 per barrel, around half the level at which they started 2020. The Western Canada Select benchmark for oil has fallen further as well, finishing Monday at US$17.80, down more than 50 per cent year-to-date.
All of this has added up to trouble for Canadian oil and gas producers, shares of which were walloped on Monday. The S&P/TSX Capped Energy Index, a collection of oil and gas companies, declined by more than 27 per cent for the day.
Raymond James analysts said in a report that they were making a “tactical decision” to lower the ratings for “all but a very small handful” of the Canadian oil and gas producers they cover until the fog clears.
“At this juncture, there remains a considerable amount of uncertainty, not the least of which being the Kingdom’s (Saudi Arabia’s) intended strategy,” said the Raymond James analysts. “While share prices of oil and gas producers were already facing generational lows, the potential for a sustained period of sub-US$40/bbl oil is almost certainly to result in a flight to (relative) safety within the sector.”
Investors searching for safe havens from the storms raging across the equity and commodities markets helped push down bond yields again as well. The yield on the Government of Canada’s 10-year bond skidded to approximately 0.54 per cent, which was almost the same as that of the five-year bond.
“Ultimately, the narrative is changing daily, but there are two commonalities which are becoming more entrenched,” wrote Ian Pollick, the head of North American rates strategy at CIBC World Markets. “The first is that we are now on the cusp of a proper liquidity event. The second is that we are concurrently experiencing a negative inflation shock. Together, these forces represent a damning combination for bond yields.”
Central banks in Canada and the U.S. have already cut their key interest rates in response to the coronavirus, but expectations are rising now for further monetary easing. Eyes are also turning towards governments for action on their end.
“This move is just too fast, too violent and too worrisome for some kind of a policy stimulus not to be put up,” Schwartz said.
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