Oil’s collapse is ripping through financial markets, broadening a selloff in stocks beyond energy companies and leaving investors with few havens as assets from metals to corporate debt sink.
Brent crude on Wednesday fell below $65 for the first time since 2009 as OPEC cut its forecast for 2015 demand, raising concern over the strength of the global economy and leaving investors contemplating when oil’s plunge will reach a bottom.
“As great as it feels to pump $2 gasoline at the station, it’s not a healthy environment for financial assets,” Walter Todd, who oversees about $1 billion as chief investment officer for Greenwood, South Carolina-based Greenwood Capital Associates LLC, said in a phone interview. “It’s rare to see commodity prices fall this quickly in a non-recessionary situation. You really need to see some stabilization.”
The selloff sent the MSCI All-Country World Index to its biggest drop in two months. The Standard & Poor’s 500 Index lost 1.6 percent, Canadian stocks plunged to the lowest since February and emerging-market shares fell to an eight-month low. Traders are almost certain that Venezuela will teeter into default as bonds plunge to a 16-year low and the cost of default protection soars to a record. A measure of risk in the U.S. junk-bond market rose the most in two months. Copper fell 1.2 percent and gold slipped 0.2 percent.
Investors sought relief in U.S. Treasury securities as 30-year bond yields fell to a seven-week low, and the yen capped its biggest three-day gain versus the dollar in more than a year.
While oil prices have been spiraling downward since June, entering a bear market and dragging down energy shares, the pace of Wednesday’s decline spurred selling in S&P 500 groups that helped drive the benchmark gauge to an all-time high on Dec. 5. All 10 major industries in the S&P 500 slumped at least 1 percent Wednesday.
‘Human Emotion’
“There’s nothing like human emotion to take over in the short term, and fear is taking over; it looks like this really is a slowdown,” Ron Weiner, president and chief executive officer of RDM Financial Group in Westport, Connecticut, said. His firm oversees $750 million. “In this case it really is an oil story, it really is a global slowdown of some sort.”
OPEC cut the forecast for how much crude it will need to provide in 2015 to the lowest level in 12 years on surging U.S. shale supplies and lower demand estimates amid signs of a slowing growth in economies from China to Europe.
Japan has already slumped into its fourth recession since 2008, while China’s economy, the world’s second-largest, is forecast to grow this year at the slowest pace since 1990, according to the median estimate in a Bloomberg survey. The European Central Bank last week unveiled “substantially” lower forecasts for inflation and growth in the euro region, warning of a deflationary spiral. Russia is also heading toward its first recession since 2009.
Oil Mantra
“The mantra of ‘lower oil prices are good for the economy’ can only last so long until finally there’s a break in the psychology of investors,” Jeff Sica, president and CEO of advisory firm Circle Squared Alternative Investments, which oversees $1.5 billion, said by phone. “You start to realize the reason why oil prices are declining is because there’s severe economic weakness that has yet to be acknowledged. It’s bringing down all commodity prices.”
The Markit CDX North American High Yield Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, climbed 14.9 basis points to 371 basis points at 4:01 p.m. in New York, according to data compiled by Bloomberg. The credit-swaps index typically rises as investor confidence deteriorates and falls as it improves.
‘No Bottom’
The bear market that has cut the price of crude almost in half in less than six months is calling into question the prospects for North American companies that have been aided by the boom in energy production in the past decade. Banks, capital goods makers and technology companies helped lead declines Wednesday as the S&P 500 slid the most in two months and reached a five-week low. Exxon Mobil Corp. and Chevron Corp. sank at least 2 percent.
“For the energy stocks, it’s like there’s no bottom,” Terry Morris, a senior equity manager who helps oversee about $2.8 billion at Wyomissing, Pennsylvania-based National Penn Investors Trust Co., said in a phone interview. “Because it’s year-end and so many money managers are lagging the index, they have no interest in buying energy between now and year-end. Energy might not start to turn around until January.”
Morris added that “it’s probably a decent buy if you have patience.”
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