U.S. stock gauges lost altitude in late-morning Tuesday action, with the Dow pulling back from a 945-point gain and other benchmarks retreating sharply over the past hour of trade. The major benchmarks are coming off their worst one-day loss since the 2008 financial crisis and had opened solidly higher, as investors attempt to stage a rebound from a selloff inspired by crashing crude-oil prices and intensifying fears of COVID-19. At last, the Dow Jones Industrial Average
DJIA,
+0.88%
was down 58 points, or 0.2%, at 23,820, after jumping by as many as 945 points earlier, a gain of 3.9% at its Tuesday peak. Meanwhile, the S&P 500 index
SPX,
+1.10%
was off less than 0.1% at 2,745 and the Nasdaq Composite Index
COMP,
+1.43%
was up 0.2% at 7,962, after both opened sharply higher to start the session.
Plunging stock markets, bond yields, and oil prices are creating a perfect storm of adverse conditions sure to impose severe damage on the real economy. Nervous markets are particularly focused on corporate credit markets.
Borrowing by non-financial companies has reached historic highs as companies have gorged on cheap credit and easy borrowing terms to goose shareholder returns. The prospect of widespread defaults in the debt-laden corporate sector is the weakest link in our fragile global economy, which is even more highly leveraged than the one which imploded during the 2008 financial crisis.
Will the banking system hold up? Optimists point to the significantly higher levels of capital that exist today in the banking system as compared to 2008. Yet, the fact that capital is twice as high as it was during those go-go years does not mean it is high enough. Under current rules, banks are still allowed to borrow 94 cents for every dollar of their funding. Even if bank capital is sufficient to keep the system afloat, will the biggest banks have the balance sheet capacity to continue lending? Indeed, to address the needs of the real economy, they will need to expand their balance sheets to take up the slack as corporate bond markets seize up.
Simply keeping the banking system solvent will not be sufficient to meet the economy’s needs, particularly if the banks retrench on credit, withholding loans to all but the most creditworthy, as they did during the financial crisis.
Bank-centric bailouts don’t work
In recent years, the Fed has been repeatedly urged to raise bank capital requirements through something called a Countercyclical Capital Buffer (CCyB). The CCyB is designed to increase capital levels toward the end of an economic cycle. This helps constrain debt-driven asset bubbles and also gives banks excess capital to release in a downturn so that they can expand credit when the economy needs it the most. But the Fed has repeatedly refused to invoke the buffer, while allowing banks, on average, to deplete their capital levels through shareholder payouts that exceed their earnings.
WASHINGTON, DC - MARCH 03: Federal Reserve Chair Jerome H. Powell announces a half percentage point interest rate cut during a speech on March 3, 2020 in Washington, DC. (Photo by Mark Makela/Getty Images)
Last week, with astonishing timing, the Fed finalized new capital rules which would weaken bank capital further, including a change which would reduce Tier 1 capital — one of three key capital metrics — by $100 billion. As a rule of thumb, $1 of Tier 1 capital supports roughly $16 of borrowing. Thus, if banks decide to distribute this $100 billion to shareholders, they could reduce their lending capacity by $1.6 trillion. Notably, as part of this rulemaking, the Fed will no longer require banks to have sufficient capital to expand lending during economic stress, one of the reasons why big banks’ capital minimums dropped.
The Fed could still reverse course, invoke the CCyB and apply it to this year’s round of stress testing. This would keep banks from distributing that excess capital. Yet, economic turmoil is already upon us. Such measures will help, but will be too little, too late. The Fed could, of course once again, pump bailout money into banks, hoping it will flow through to the real economy. This was the approach we used in 2008.
But while some banks did a better job supporting lending than others, for the most part, bailout funds did not support the real economy. They primarily propped up the irresponsible financial behemoths who caused the crisis and who were teetering on the edge of insolvency. Indeed, the banks were paying their executives big bonuses by the end of 2009, even as the rest of the economy struggled in the depths of severe recession. It took nearly 10 years for the so-called recovery to trickle down to middle- and low-income working families. Bank-centric bailouts don’t work.
An essential alternative to bank credit
Another option would be for the Fed to seek authority from Congress to buy the bonds of non-financial companies, as suggested by Eric Rosengren, the President of the Reserve Bank of Boston, last week. By doing so, the Fed would be able to keep corporate bond markets functioning and accessible to solvent companies in sectors hit hardest by the fallout from coronavirus, including energy, transportation, hospitality, and retail. This would help give such companies access to sufficient funding to stay in business, directly mitigating the risk of widespread layoffs and cascading bankruptcies. It will also give them an essential alternative to bank credit, if big banks are unwilling or unable to lend to them, as was the case in 2008. This direct support to the real economy would be markedly different from the 2008 “playbook” when the Fed’s bond purchases were confined to Treasuries and GSE mortgage securities. These were purchased from big bank intermediaries which kept the funds locked up in their own, interest-bearing reserve accounts at the Fed.
BOSTON - AUGUST 23: Boston Federal Reserve President Eric Rosengren on Tuesday, Aug. 23, 2011. (Photo by Wendy Maeda/The Boston Globe via Getty Images)
What we learned from the last crisis is that bank bailouts help banks, not the rest of us. If the Fed has to step in — and it will — it should provide help directly to the real economy. For that matter, depending on how bad this gets, the Fed might also consider ginning up its printing presses to provide assistance to working families. Radical? Yes. But why would this measure be any more objectionable than the Fed using its printing press for the 2008 bank bailouts, or its continuing practice of printing money to pay big banks interest on their reserves?
To be clear, I suggest such drastic measures with trepidation. Indeed, I have long argued that the Fed is too involved in our economy, trying to manipulate growth through aggressive monetary policy. I would like the Fed to extricate itself. Ultra-low interest rates create bubbly financial markets, and bubbly financial markets react violently on bad news. Witness the extreme volatility we are now experiencing, including Monday’s 2,000 point drop in the Dow.
Unfortunately, we are where we are, with not a lot of good options. So if we are going to have more bailouts, please, let’s bail out the real economy, and let the big banks fend for themselves.
Sheila Bair is the former Chair of the FDIC and has held senior appointments in both Republican and Democrat Administrations. She currently serves as a board member or advisor to a several companies and is a founding board member of the Volcker Alliance, a nonprofit established to rebuild trust in government.
Wall Street's rally faded midday Tuesday, as sentiment waned that President Donald Trump would introduce a robust economic package in time to shore up the growing financial impact from the coronavirus.
Markets had rebounded at the opening bell on Tuesday, with the Dow Jones Industrial Average soaring by almost 900 points just one day after a historic rout that saw the blue-chip index drop by 2,013 points, the most ever.
Trump said Monday he will take "major" steps to ease concerns about the economy in light of the virus outbreak, adding that he would be meeting with congressional Republicans on Tuesday to discuss payroll tax cuts.
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“We’ll be discussing a possible payroll tax cut or relief, substantial relief, very substantial relief, that’s a big number,” Trump told reporters at a news briefing Monday afternoon.
However, White House officials were reportedly caught off guard by the president's comments, with one official telling CNBC the actual details remain up in the air. “It’s not there right now,” an official said of any economic plan. “A lot of details need to be worked out.”
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Global stock markets had an ugly start to the week, after an all-out price war between key oil producers Saudi Arabia and Russia added to heightened concerns connected to the economic impact of the rapidly spreading coronavirus outbreak.
Companies have canceled industry gatherings, banned nonessential travel, and asked employees to work from home where possible. Health officials have even urged older people to avoid cruise ships, lengthy trips and public events.
March 10, 202002:55
The White House has been consulting with industry groups on the kind of immediate relief that might be required. Executives from at least seven of Wall Street's major banks are set to meet with Trump at the White House on Wednesday afternoon to discuss the response to the epidemic.
Trump has continually downplayed the effects of the coronavirus — tweeting that a steep drop in oil prices is good for consumers, and blaming the news media for the plunging stocks.
“While we believe that a fiscal stimulus package will be produced, the timing and scope remain uncertain,” said Ed Mills, an analyst at Raymond James. “Some Republican leaders on the Hill signaled that they believe these actions to be premature and key Congressional Democrats arguing that there are more immediate priorities over tax cuts and plan to introduce their own package in coming days.”
Foto: (Photo by Dmitry Korotayev/Kommersant Photo via Getty Images)
General view of the Arctic oil rig 'Prirazlomnaya' in the Barents Sea owned by energy giant Gazprom on September 14, 2014 near Naryan Mar, Russia.
Russia and Saudi Arabia are prepping for a lengthy oil-price war after OPEC+ negotiations fell through and sparked an all-out sprint for market share.
Saudi Arabia escalated the conflict on Tuesday, boosting production plans to a record 12.3 million barrels per day starting April 1.
Russia fired back within minutes by hiking its planned output by 500,000 barrels per day, Bloomberg first reported.
Initial strikes over the weekend pushed oil’s price down the most since 1991 on Monday, but optimistic sentiment from Moscow could be driving a mild recovery in Tuesday’s session.
Russia’s energy minister said the nation is still open to OPEC+ cooperation down the road. The coalition has meetings scheduled for May or June.
Russia and Saudi Arabia are strapping in for a prolonged oil-price conflict, though a peace deal isn’t yet out of the cards.
Both nations on Tuesday hiked warnings of dropping prices and flooding the oil market with inventory. The announcements arrive after oil prices slumped the most since 1991 on Monday. The commodity has since recovered some losses in Tuesday trading but remains well off its early-2020 levels as the global market braces for long-term volatility.
Saudi Arabia escalated its bout on Tuesday, saying state-owned Saudi Aramco could push its total output to a record 12.3 million barrels per day starting April 1. The supply jump is more than 25% higher than the 9.7 million barrels per day produced in February and forces Aramco to empty its sizable inventories while operating at maximum capacity.
Russia fired back in a matter of minutes, threatening to raise output by 500,000 barrels per day in the near future, Bloomberg first reported. The country can begin output increases as soon as April 1, when the current OPEC deal expires. While Russian oil firms can hike production by about 200,000 to 300,000 barrels per day in the short-term, the 500,000 barrels per day jump is achievable down the road, Energy Minister Alexander Novak said.
Russia currently produces about 11.3 million barrels per day, while Saudi Arabia puts out roughly 9.7 barrels per day. Though Russia’s output hikes would yield record-high production levels, they still fall under Saudi Arabia’s April plans.
The conflict kicked off last week when OPEC sought to cut production among member nations and support oil prices. The coronavirus outbreak had eaten away at demand for the commodity, and the historically cooperative group looked to ink a new deal on Friday. Yet Russia refused to join the Saudi Arabia-led coalition, driving a Friday sell-off that cut prices by 11%.
Saudi Arabia responded Saturday by slashing its official selling price the most in about 20 years. The tit-for-tat sparked a global price war as the two biggest exporters rushed to dominate the commodity market. The fresh volatility drove Brent crude down more than 20% on Monday and contributed to the US stock market’s biggest one-day rout since the financial crisis.
Moscow hinted on Tuesday that future cooperation with OPEC+ is still on the table. The country is open to further talks at OPEC+ meetings scheduled for May or June, Novak said.
„I want to say that the door isn’t closed,“ Energy Minister Alexander Novak said on the state-operated Rossiya 24 TV channel, according to Bloomberg. „If needed, we have various tools, including reducing and increasing production, and new agreements can be reached.“
The optimistic sentiment and an oversold bounce likely drove the commodity’s recovery after Tuesday’s open. Brent crude, the international benchmark for oil pricing, traded at $37.60 per barrel as of 9 a.m. ET Tuesday, up about 12.5% from its previous close.
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Russia Energy Minister Alexander Novak pictured at a joint press conference during the 173rd Ordinary Meeting of the Organisation of Petroleum Exporting Countries (OPEC) in Vienna, Austria on November 30, 2017.
Omar Marques | Anadolu Agency | Getty Images
Russia has refused to rule out talks with OPEC to stabilize energy markets, according to reports, after oil prices registered their worst declines in almost 30 years on Monday.
International benchmark Brent crude traded at $37.32 Tuesday afternoon, up over 8.5%, while U.S. West Texas Intermediate (WTI) stood at $33.69, around 8.2% higher.
It comes after Brent and WTI both dropped 24% on Monday, sinking to more than four-year lows.
The moves follow a breakdown in talks between the kingpin of oil-producing group OPEC, Saudi Arabia, and non-OPEC member Russia late last week.
Markets had been hoping for an agreement by both countries, and other oil producers, to curb oil output in an effort to bolster prices; their failure to agree led oil prices to crash on Monday.
Speaking to reporters Tuesday, Russian Energy Minister Alexander Novak said that Moscow had not ruled out measures with OPEC to stabilize oil markets, according to Interfax news agency.
Russia's energy ministry has proposed to hold a meeting with Russian oil companies on Wednesday, Reuters reported, citing two unnamed sources.
They are expected to discuss whether to prolong Russia's alliance with OPEC.
The collapse of the OPEC and non-OPEC agreement "does not appear to have been part of any pre-meditated strategy or plan on Russia's part or done with the intention of undermining U.S. shale production," Daragh McDowell, head of Europe and principal Russia analyst at Verisk Maplecroft, told CNBC via email.
"The arrangement was unpopular with key members of the Russian elite — notably Rosneft's Igor Sechin — and the economic damage caused by the COVID-19 outbreak provided a handy pretext for abandoning the deal."
How did we get here?
Last week, the 14-member group recommended additional production cuts of 1.5 million bpd starting in April and extending until the end of the year. But OPEC-ally Russia rejected the additional cuts when the broader energy alliance met on Friday.
The meeting concluded with no directive about the production cuts that are currently set to expire at the end of the month.
In response, Saudi Arabia announced massive discounts to its official selling prices for April, with state-owned oil giant Saudi Aramco expected to ramp up production.
Riyadh currently pumps 9.7 million bpd but has the capacity to increase production up to 12.5 million bpd.
The stinging travel fallout from the coronavirus outbreak continues.
American Airlines early Tuesdayannounced sweeping flight cutbacks due a steep drop in travel demand. And unlike the significant cuts announced by United last week, they extend into the peak summer travel season.
Airlines started cutting flights to China in late January and have had to take a series of even more aggressive cuts since then as the virus spread around the globe and travelers grew anxious about flying.
American said it is reducing international seat capacity by 10% this summer, including a 55% reduction in flights across the Pacific.
Flights within the United States will be reduced by 7.5% for the month of April. Travelers holding tickets for travel on the affected routes will be rebooked on other flights or offered the option of a refund, even if they are holding a nonrefundable ticket.
Some specifics on the flight cuts:
Suspending service to mainland China and Hong Kong from Los Angeles through the summer.
Suspending service to mainline China from Dallas through the summer.
Suspending service to Hong Kong from Dallas through June.
Suspending service to Rome from Philadelphia effective immediately through the end of April.
Extending the suspension of service to Milan through early summer.
Suspending flights to Rome from Chicago and Charlotte, North Carolina, through early summer.
Delaying the seasonal resumption of several summer flights to Europe, including New York and Dallas to Rome.
Reducing service to Paris and Madrid for parts of May and June
American did not provide details on the domestic flight cuts but said it plans to reduce the number of daily flights on routes with several daily departures to affect fewer customers.
Delta also planning cuts: 'This is a fear event probably more akin to 9/11'
Meanwhile, Delta CEO Ed Bastian, in his first public comments on the coronavirus impact, said Tuesday morning at the J.P. Morgan Aviation, Transportation and Industrials Conference that bookings are down 25% to 30% and the airline is prepared for things to "get worse.''
The airline is cutting international flight capacity by 20% to 25% and domestic by 15%.
Unlike the recession, which hurt business travel more than vacation travel, the falloff in bookings is broad, Delta executives said. "This clearly is not an economic event,'' Bastian said. "This is a fear event probably more akin to 9/11 than what we saw in (the recession) in 2009.''
Saudi Arabia and Russia intensified an escalating oil-market war on Tuesday, with Riyadh raising output and Moscow saying it was ready to pump more crude.
State-run Saudi Arabian Oil Co. said it would boost production to 12.3 million barrels a day in April, some 300,000 barrels a day over the company’s previous maximum sustained capacity.
Russian Energy Minister Alexander Novak, meanwhile, said his country could rapidly open its own taps.
Even as the price war escalated with fresh salvos from both sides, former Saudi energy minister Khalid al-Falih was in talks with Mr. Novak in an attempt to reverse the production hikes and revive the collective OPEC-Russia output curbs, according to Saudi-government advisers and officials.
Mr. Falih, who negotiated the initial production cuts in 2016, is now Saudi Arabia’s minister of investments. His outreach to Mr. Novak is done with the approval of Saudi authorities, the advisers said. If Mr. Falih’s mediation succeeds, the advisers and officials said, OPEC and its allies including Russia will convene an emergency meeting in April.
Mr. Novak said Moscow isn’t ruling out further cooperation with OPEC, adding that the next scheduled meeting is planned for May or June.
“The doors are not closed,” he said.
Saudi Arabia and Russia’s decisions to flood markets are surprising, as China—the world’s largest oil importer—has been hobbled by the deadly coronavirus, which has hurt its demand for oil after refineries and factories were forced to shut.
Saudi Arabia’s struggle for oil-market supremacy might earn it a sliver of market share at the expense of Russia and rival U.S. shale producers, but the cost of a price war might be too much for the kingdom to bear, analysts and oil officials say.
The combination of declining global consumption and rising supply pushed Brent crude, the benchmark for global prices, to its sharpest decline since the first Gulf War in 1991 on Monday. Some of these losses were recouped Tuesday as the Brent oil price gained 8% amid a broader revival in markets.
Saudi Arabia’s aggressive discounts are targeting some of Russia’s core markets in China and Northern Europe. The kingdom is also taking aim at U.S. oil producers, Saudi and OPEC officials said.
The Russian energy minister declined to comment and the Saudi energy minister didn’t respond to a request for comment.
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The Dow sank over 2,000 points Monday and oil had its worst drop since 1991. WSJ’s Paul Vigna breaks down how we got to this point and what investors will be looking at moving forward. Photo: Timothy A. Clary/AFP via Getty Images
Some oil officials say they struggle to see the logic behind Saudi Arabia’s decisions. Others see the battle as tied to Saudi Crown Prince Mohammed bin Salman’s recent efforts to tighten his grip on power and raise his international clout, according to people involved in the OPEC talks.
Russia’s failure to find common ground with Saudi Arabia and OPEC on oil cuts was preceded by talks in early February between Riyadh and Moscow that focused on the possibility of forging a broader, long-term alliance. Under one scenario, Saudi Arabia would have sped up its investments inside sanctions-hit Russia and backed the Kremlin’s military efforts in Syria, according to people familiar with the matter.
Ultimately, the crown prince didn’t commit to a deal, say the people familiar with the matter, because he didn’t want to alienate the U.S. Weeks later, roughly at the same time that Russia was refusing to endorse the Saudi-backed plan to cut oil output, Mr. Putin was initiating a rapprochement with Turkey, a Saudi foe, the people said.
“It’s all about egos now, not about the oil market,” said a Saudi-government adviser.
Meanwhile, Prince Mohammed saw the OPEC debate as a way to assert his broad influence over the kingdom’s oil policies and to prove to his older brother, Saudi energy minister Prince Abdulaziz bin Salman, that he could force Russia’s hand, according to people familiar with his thinking.
In a terse phone call to Prince Abdulaziz late Thursday, the crown prince overruled his brother, who had agreed to a three-month production cut with OPEC, and extended the proposed cuts through the end of the year, these people said.
Prince Abdulaziz bin Salman, Saudi Arabia’s energy minister, on Thursday.
Photo:
christian bruna/Shutterstock
The crown prince ordered the minister to force OPEC to adopt the decision—even if that meant risking any hope that Russia would join in, they said.
Now the kingdom is pursuing a strategy of undercutting its rivals by drowning markets with cheaper oil—a move that has a tendency to backfire, say longtime market watchers.
On Saturday, the Saudi energy ministry told Aramco officials that instead of cutting production, they should pump more oil and lower the price. Saudi Arabia soon spread the word throughout the market. “It was the Saudi declaration of war against Putin,” said a senior Saudi official.
Within hours, officials at the finance ministry were tasked with preparing a budget scenario that envisions benchmark Brent crude prices dropping into a $12-$20 a barrel range. All Saudi ministries were also asked to cut their spending significantly to prepare for this scenario.
But the strategy has backfired before.
In 2014, then-Saudi oil minister Ali al-Naimi persuaded OPEC to pump at will to compete with U.S. shale producers. His rationale was that the cartel’s members had the ability to produce at extremely low costs. But after the price of Brent crude fell below $28 a barrel in early 2016, the Saudi royal family fired him. His successor, Mr. Falih, negotiated a pact between OPEC and Russia to cut production in the first OPEC+ deal. Within months, oil prices more than doubled.
The move to depress prices also missed its mark in the 1980s and led to a period known in oil circles as the “Lost Decade.” In 1986, OPEC faced competition from rising North Sea production. Saudi Arabia’s delegation was so upset about OPEC members flouting the group’s production agreements that it unleashed a flood of oil that sank prices for a prolonged period.
Eventually, Saudi Arabia backtracked and cut production, but the move wasn’t a complete failure, as it helped score a political victory against the Soviet Union. Riyadh had been backing insurgents battling Russia in Afghanistan—many of whom would later found al Qaeda. As the oil price fell to around $30 a barrel, Russia faced a budget crisis that contributed to food shortages and an end to its war in Afghanistan. Its then-leader Mikhail Gorbachev retreated from Kabul and launched the restructuring of Russia under his perestroika policy.
Russia is better prepared to weather low oil prices than in the past. Oil is now accounts for less than a third of budget revenue. The country has also accumulated massive reserves. The Russian finance ministry said Monday that it could withstand 10 years of prices at $25 to $30 a barrel.
Still, some Russian producers say the oil-market war is excessive.
“I’m in shock. This is a very unexpected, irrational decision to put it mildly,” Leonid Fedun, vice president of Russian private producer Lukoil was reported as telling Russian newspaper the Bell. Russian oil companies would like to increase production, he said, but that won’t make up for losses from falling prices.
The mood is more somber in Saudi Arabia, which needs oil prices over $60 a barrel to balance its budget, according to Saudi officials. The kingdom is now contending with its own coronavirus outbreak, moving Monday to suspend all air travel with many of its neighbors.
Saudi Arabia’s national oil company Aramco fell about 7% to 27.95 riyals ($7.45) a share on the Saudi domestic exchange Monday. The Saudi price decrease has “literally burned all global energy investors,” said a Saudi official. “[Saudi Aramco] Won’t sell a share to foreigners again,” he said, referring to the Crown Prince’s plan to list Aramco internationally.
—Rory Jones, Donna Abdulaziz and Georgi Kantchev contributed to this article
