On top of the virus came oil price worries

Date: March 16, 2020

  • WHO declared Covid-19 to be a global pandemic;
  • STI lost 11% – worst since 2008’s US sub-prime crisis;
  • Wall Street entered bear market;
  • Entire US Treasury yield curve dropped below 1%;
  • US on Friday declared national emergency;
  • Crashing oil prices added to market’s woes;
  • Global growth downgraded;
  • Singapore is preparing second virus package


WHO declared global pandemic, STI lost 11%

The World Health Organisation last week declared Covid-19 to be a global pandemic, just a few days after oil prices crashed on supply worries. Add to this news that the spread of the virus is increasing, and stock markets stood little chance – the Straits Times Index crashed 327 points or 11 per cent over the week at 2,634. It was the worst weekly loss since the US sub-prime crisis of 2008.

Wall Street entered bear market territory; Trump declared national emergency

Over in the US, the stock market entered official bear market territory, ie. At least 20% off its highs, when its major indices plunged 5-6% on Wednesday despite US President Trump that day announcing a series of measures to address the rising virus problem in the US.

Wall Street’s major indices then crashed 10% on Thursday but regained 9% on Friday after US President Trump declared a national emergency, a move which gives the government access to US$50b in funding.

Among the measures announced so far was a 30-day suspension in travel from Europe, except from the United Kingdom, beginning Friday. Trump said this was “strong but necessary action” to prevent the coronavirus from escalating further in the U.S.

Entire US Treasury yield curve dropped below 1% for first time in history

Last week was also notable for the US bond market – on Monday, the entire Treasury yield curve dipped below 1% for the first time in history. Analysts said this signalled not just a flight out of risky assets into the relative safety of bonds, but also the worry of an impending global recession and aggressive monetary action by the US Federal Reserve.

The yield on the benchmark 10-year Treasury touched a record low of less than 0.4%, while the 30-year Treasury yield slid below 1% – an unprecedented event.

On Friday however, the yield on the 10-year note jumped 15 basis points to slightly above 1%. The yield on the 30-year Treasury bond soared 19 basis points to 1.60%.

Fed expected to cut rates – again

The scale of the latest yield declines suggests that investors expect the Federal Reserve to cut interest rates again. The US central bank on 3 March had made an emergency rate cut of 50 basis points to shore up the economy against coronavirus.

The federal funds futures market is currently pricing in a 100% chance of the Fed cutting again at this week’s meeting. There is a 91% probability of a 25 points cut and a 9% chance the reduction will be 50 points.

Oil prices crashed

On Monday last week, investors woke to find that oil prices had crashed about 34% over the weekend, a plunge that was later trimmed to 20%. The dramatic collapse was prompted by Saudi Arabia, which sharply cut prices. It was a response to Russia, which over that weekend refused to restrict how much oil it was producing.

Global growth is being downgraded

The epidemic’s sweeping impacts led the Organization of Economic Cooperation and Development (OECD) to warn global growth could slow to 1.5% this year – half the rate it projected in November. Similarly, the International Monetary Fund expects global growth of less than 2.9%, after it predicted 3.3% in January.

Singapore government preparing second virus package

At a forum last week, Deputy Prime Minister Heng Swee Keat said the government has started working on the need for a second package “to stabilise the economy and to emerge stronger’’ from the current crisis. He also raised the possibility of using some of the national reserves for this purpose.

In February, Mr Heng unveiled the Government’s latest Budget, which included a S$4b Stabilisation and Support Package to help those affected by the outbreak.

In a Facebook post on Wednesday last week, President Halimah Yacob noted the worsening global conditions and said: “In such a situation, we must do our utmost to support our people and our businesses, including considering using the past reserves if necessary. If our public health is at stake and our people’s welfare affected, we need to do the necessary.”