Crude Oil "Black Swan" Triggering US Stock Melting Or Returning To "Zero Interest Rate"

Under the shadow of the global spread of the new crown pneumonia epidemic, the "black swan" has emerged from the international crude oil market. From the Asia Pacific market to the European market, stock markets in all countries have seen a rare "big earthquake".

In March 9th, the three major indexes of the US stock market opened up collective diving, and the S & P 500 index fell more than 7%, triggering the fusing mechanism, suspending the transaction for 15 minutes, and the Dow Jones Industrial Average began to slam 1800 points at the beginning. As of twenty-first Century, the economist reported that the Dow index narrowed to 5.67%, the NASDAQ index fell 5.07%, and the S & P 500 index fell 5.45%. Since the US stock market has experienced "roller coaster" market for two consecutive weeks, the agency warned that the new round of turbulence will be a full stop for the current bull market.

Analysts interviewed by reporters pointed out that the current impact of the new crown pneumonia epidemic (hereinafter referred to as the epidemic) is not obvious in the US economic data. However, if the epidemic continues to spread, the downside risks of the US economy will continue to increase. After last week's emergency rate cut of 50 basis points, the market's expectations for further easing of the Federal Reserve continued to heat up, the March policy meeting or the interest rate cut again, and the quantitative easing policy may be resumed in the middle of the year.

Crude oil triggers sharp fall in US stocks

As the OPEC+ meeting failed to agree to a "collapse" of Russia's production cuts, Saudi Arabia, the Middle East oil producer, first launched the oil price war in March 7th. On Sunday, the Middle East stock market was hit by a crash, and the Saudi TASI composite index fell more than 7%. The Kuwait stock index closed down and triggered a fusing mechanism.

In March 9th, Brent crude oil futures fell 31% at a time, narrowing to 23% at the end of the release, at 34.87 U.S. dollars / barrel, and NYMEX crude fell 24%, to 31.54 U.S. dollars / barrel. The collapse of oil prices triggered a chain effect in the financial market, and the global stock market was collectively occupied.

In the Asia Pacific market, Thailand and Australia fell more than 7%, while Philippines, Indonesia, Vietnam and Singapore fell more than 6%, while India and Japan fell more than 5%, while Korea, Malaysia and China fell more than 3%. In the European market, Italy announced the expansion of the blockade area in the worst hit area. The stock market plunged more than 10% under the double negative profits, and the major stock indexes such as Germany, France, Austria and the United Kingdom dropped by about 7%.

Before the opening of the stock market on Monday, the US stock index had actually changed, and the S & P 500 index futures fell nearly 5%, triggering trading restrictions, indicating that the market will usher in a new round of turbulence. Considering that the US stock market has been in a big turbulence in the past two weeks, the three major indexes have fallen into the adjustment area (10% from the recent high point withdrawal). Wall Street institutions have warned that the new round of collapse will drag the bull market of the US stock into the bear market (from the recent high point to withdraw 20%).

MSCI, the index maker, has warned that US stocks still have room to fall further by 11%. If the Dow Jones index closed at 25864 points in March 6th, the Dow still has a drop of nearly 3000 points. Deutsche bank analysts also said in the report that if the epidemic can not be quickly controlled, the S & P 500 index will fall into a "bear market" range.

Yang Delong, chief economist of Qianhai open source fund, believes that after ten years of bull market, the three major stock indexes are at a historical high level. Especially, the engine of this bull market, technology and leading stock, has generally risen more than 10 times. The rise of US stocks has accumulated a lot of profits. Once there is a stir, there may be a huge earthquake, which has dropped sharply.

"It is said that 80% of the transactions in the US market have been programmed, that is, procedural transactions will accelerate the process of killing. Many panic selling is actually triggered by some stylized transactions, so the US shares dive faster than the A shares, because the majority of the US stocks are quantified trading, and the machines are very fast when they sell. Therefore, the US stock market is the main trend this year. Yang Delong said.

Brewing economic stimulus policies

From the economic fundamentals, recent data show that the US economy has not yet been hit by the new crown epidemic. Last week, the United States released more than expected growth in non farm employment in February. The unemployment rate fell to 3.5% at a historic low. But with the spread of the new crown and the rising risk of the global recession, the downside risks of the US economy are increasing. In March 9th, the rating giant Moodie lowered the actual GDP growth in 2020 to 1.5% in the US, down from the previous estimate of 1.7%.

Moodie believes that the risk of global economic recession is rising. The longer the epidemic affects economic activity, the greater the impact on market demand will lead to economic recession. In particular, the continued decline in consumption, coupled with the prolonged disruption of business operations, will damage the profitability of enterprises, lead to layoffs and suppress market confidence. This situation may ultimately contribute to the self strengthening of the recession, and asset price shocks will also intensify.

At present, the epidemic in the United States is also continuing to spread. Over 560 cases have been confirmed, and 8 states such as California and New York have entered the public health emergency. The high-tech enterprises in Silicon Valley and the financial enterprises in Wall Street have been affected to varying degrees. Recently, Trump has signed a $8 billion 300 million emergency spending bill to curb the spread of the new crown. At the same time, the bill stipulates that low interest loans of up to US $7 billion will be issued to the affected small businesses.

Last week, a small group of officials from the White House and the Ministry of Finance launched discussions on economic stimulus measures, including the temporary extension of paid sick leave and assistance to the affected enterprises, according to a US media report quoted by people familiar with the matter. The plan has not yet been submitted to the president. People familiar with the matter say it is not clear what time the measure will take place, but it may be implemented step by step, first providing assistance to people infected with the disease and then extending it to the affected enterprises and their employees.

As risk aversion increased, investors flooded into the US debt market, resulting in continued low innovation in the US bond yields. The 3 month and 10 year US debt yield curve was once upside down, indicating that the market was worried about the recession. The pressure on the fed to become more relaxed is growing. Trump once again complained to the press last Friday that the Federal Reserve should cut interest rates and stimulate the economy.

Noah's chief economist, Xia Chun, told reporters that a sharp drop in oil prices will affect the shale oil industry and its upstream and downstream businesses in the US. If investors are worried about the solvency of enterprises in the recession, they will sell high-yield bonds in these industries, which may lead to the spread of high-yield debt and treasury bonds, which will increase the cost of re issuing bond financing in these industries and form a vicious circle. He also pointed out that the risk aversion of investors will also affect the price and spreads of high-yield debt in other industries, and the risk can be transmitted from the energy industry to other non energy industries.

Will the Fed return to zero interest rates?

Following last week's emergency rate cut of 50 basis points, the market's expectations for further easing of the Federal Reserve continued to heat up. It is widely believed that the Federal Reserve will cut interest rates again at the monetary policy meeting held on 17-18 March.

Pimco Fels Joachim, the world's chief economic adviser, said in its report that in the first half of the year, the US and European economies were in a "technical recession" as the epidemic continued to escalate. If the epidemic reaches its peak in the next two months, the recession will be short-lived, and the second half is likely to revive.

But Joachim Fels is worried that in the environment of corporate cash flow reduction, there may be cracks in the US credit cycle, leading to a sharp tightening of the financial situation and in turn to the real economy. He believes the Fed will further cut interest rates and is likely to return to zero interest rate and resume asset purchase operations.

Zhang Jun, chief economist of Morgan Stanley Huaxin securities, pointed out to reporters that the impact of the epidemic on the US economy has not yet been apparent. The Fed's previous preventive rate cut has consumed some policy space to some extent. He believes that the economy outside the US is actually worse than expected, making the US economy look more resilience at the moment. With no significant change in economic data, the urgency of the US Federal Reserve to cut interest rates by 50 basis points is not strong enough.

Zhang Jun believes that the impact of the epidemic on the global supply chain may be concentrated in the first quarter or the first half of the year as the epidemic is controlled and resumed and resumed. The impact on GDP growth in the US may be about 0.1-0.2 percentage point. He believes that the follow-up depends on the spread of epidemics outside China and the measures adopted by governments. Taking into account the diminishing marginal effect of continuous interest rate cuts, Zhang Jun. expects the US Federal Reserve to restart QE (quantitative easing) in the year.

Hong Hao, managing director and head of research at the Bank of Hong Kong, believes that the fall in oil prices will lead to a sharp rise in deflation expectations. And when deflation is expected to take shape, the Fed's monetary policy will fail. If the Federal Reserve cuts interest rates by 50 basis points, it means a percentage point cut in a month. "If the crisis worsens, it will become a negative interest rate. The Fed is a global bank, which is very worrying. I think the more serious impact is that the Fed has also entered the negative interest rate, which is the real crisis in the world. Hong Hao said.

Xia Chun believes that because of the health of the banking system under the new regulatory system, the possibility that the market turmoil will evolve into a global financial crisis is unlikely to gradually absorb the impact of the recession. But the adjustment of asset prices in the medium and short term is inevitable. "As long as inflation does not rise significantly, interest rates will remain low, and funds will still choose assets that are reasonably valued after adjustment. But if inflation rises significantly, it will lead to further downward adjustment in asset prices.

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