Wow a bloodbath in the Oil Market.Friday Western Texas Intermediate closed at around 41 USD per barrel and opened Monday at 30 USD and some point was down to 27 USD.The rout in oil also has tanked almost all asset classes with stocks in East Asia closing down about 5% and US Dow futures down over 1,200 points.US 10 year yield dropping to all time low of 0.34%.Cryptos also whacked
Crazy geo-politics.Russia walked out on an OPEC-Russia meeting that was to agree to cut production to prop up prices in light of reduced oil demand due to coronavirus.Moscow wants to keep pumping to push prices lower and punish the US shale oil frackers in retaliation to US sanctions on Russia.The Saudis angry that Putin refused to cut production,now wants to flood the oil market with even more oil to punish Russia and the Saudis also want to punish the US oil frackers.
The US shale oil frackers are in trouble.They need high oil prices to stay afloat and this dip in prices is causing serious distress.Moreover,these frackers are in business only because they can finance operations via borrowing through the US junk bond market where the bond rates are artificially suppressed by the Fed money printing shenanigans.The US junk bond market (where also Tesla gets lots of its financing) has been in distress for a number of months now.In fact recently in the last few days the junk bond market froze up with no new bond issuance.Same happened in late 2018 where the junk bond market froze for 41 days (also US stocks dropped 20% then)forcing the Fed to halt its rate hike and Quantitative Tightening cycle and reverse to Quantitative Easing and rate cuts.It gets worse that even some Investment Grade Triple BBB bonds have now frozen up also with no new bond issuance in over 1 week.The seizing up of the over 10 trillion US corporate bond market is a far greater threat to the US economy than falling stocks and the Fed is actually reacting to the distress in this sector.
The US corporate bond market is just as ridiculously leveraged as the sub-prime madness of the early 2000s.Cheap loans (called leveraged loans) to undeserving companies has resulted in zombie companies that just stay alive due to constant refinancing in the junk bond market and are similar to the sub-prime loans of the housing bubble.Then the corporate bonds from these leveraged loans are just as ridiculous as the Mortgage Backed Securities (MBS) of the housing meltdown.Furthermore,the derivative products called Collateralized Loan Obligations (CLOs) for these corporate bonds are just as leveraged as the Collateralized Debt Oligations (CDOs) of the housing bubble that collapsed spectacularly in 2008.
Again just like in the housing bubble,these corporate bonds are being deliberately misrated by the rating agencies Standard & Poor's (S&P), Moody's, and Fitch Group.During the housing bubble,these rating agencies over rated the MBS and CDOs giving them triple AAA rating because the banks were paying them to mis rate them so that they can sell to naive funds.Same thing happening now.35% of the Investment Grade BBB rated US corporate bond market is junk and should be downgraded to junk bond status but the rating agencies are refusing to do so.In the United States,large funds like pension and mutual funds are barred by law from buying junk bonds thus if the Triple BBB bonds are correctly downgraded to junk then these major funds would be forced to liquidate their positions and will be Armageddon in the US corporate bond market.
With all the drama going on the Fed is under IMMENSE pressure again to cut rates yet again.They already did 50 basis points last week and there is pressure they do another 50 basis or even 75 basis points in their next March 17-18 meeting or even earlier.I dont see how the Fed can withstand the pressure and most probably will cut again this month.
Things just getting thicker by the day and global recession far worse than 2008 screaming loudly.
Futures on the S&P 500 were halted Sunday night after they declined 5%. So-called circuit-breaker levels are the thresholds at which exchanges halt or close marketwide trading due to extreme declines.No pre-market trading until market opens on Monday at 9.30 am US Eastern Standard time
And as I stated below the corporate bond market has frozen up also
And of course oil suffered its biggest single day drop (30% decline) in history and US 10 year bond records its lowest yield in history.
History is being made folks.