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First Move with Julia Chatterley
Saudi Arabia's Oil Price Cuts And Supply Threats Send Prices Down 30 Percent; Global Stock Slump, Bond Prices Soar; Italy Taking Drastic Steps To Contain The Coronavirus Outbreak. Aired 9-10a ET
Aired March 09, 2020 - 09:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
[09:00:15]
JULIA CHATTERLEY, CNN BUSINESS ANCHOR, FIRST MOVE: Live from the New York Stock Exchange. I'm Julia Chatterley. This is FIRST MOVE and here's your
need to know.
Crude crushed. Saudi Arabia's oil price cuts and supply threats send prices down 30 percent.
Risk retreats. Global stock slump, bond prices soar.
And Lombardi's lockdown. Italy taking drastic steps to contain the coronavirus outbreak.
It's looking like a manic market Monday. Let's make a move.
ANNOUNCER: This is CNN Breaking News.
CHATTERLEY: Welcome once again to all our FIRST MOVErs around the world. It is looking like an unprecedented day on global markets.
As I mentioned there, oil prices completely crushed in the session overnight, and today we've got global stock prices under severe pressure at
this moment and intensification of the corona virus outbreak, too.
And as you can imagine investors at this moment fleeing to safe havens.
Let me give you a look at what we're seeing for U.S. futures, though I have to tell you, guys, we are flying blind. Why? Well, stocks fell some five
percent overnight in the premarket session.
This triggered what's known as circuit breakers and a pause in trading. It's a tool used to try and prevent panic selling.
So what we're looking at here is losses, it seems of at least five percent at the open. That's a loss on the Dow of at least 1,200 points.
Now, if we open and lose seven percent or more, that will then trigger a 15-minute trading halt. We'll be talking you through this when we get
cracking with this stock market session in around 30 minutes' time.
I should also say we might also open higher than that seven percent, but if I look at things that track the stock markets at this moment, Exchange
Traded Funds, they're down around seven percent in this session already. So that's the indication that we're getting.
The other indication is Europe. Let me give you a look at what we're seeing for the European session, too. We are looking at losses of more than seven
percent across the board for the majors.
What about Italy? That where, of course, draconian measures have been triggered by the government in order to try and crack down on the
coronavirus spread where we've got stocks that are down some 10.7 percent. We're building a picture here.
What about in the Asia session, too? The Japanese markets falling there more than five percent. In Australia, a commodity-centric market of course,
that falling more than seven percent, too.
The one real safe haven, U.S. bonds have seen an immense flight to safety, the U.S. 10-year yield, let me show you that. Currently, at this moment,
trading at less than half a percent. Unprecedented. I can't use this word enough at this moment.
What about the epicenter of today's fears? The oil market. Crude prices set to post their biggest one day fall since 1991. That was the Gulf War, of
course. This after Saudi Arabia's decision to cut oil prices, and potentially ramp up supply. This in response to Russia's refusal to agree
production cuts last week.
All right, let's get to the drivers because John Defterios joins us now on this.
John, this is a global shock wave, a message not just to the Russians, to everyone that they still hold power and oh, boy, can they use it and that's
what we're seeing in the markets playing out today.
JOHN DEFTERIOS, CNN BUSINESS EMERGING MARKETS EDITOR: Indeed, Julia. Saudi Arabia doubling down if you will, on the action. It's extraordinary. Once
the Russians decided they were not going to cut production anymore, and they said it was a free for all from April 1, Saudi Arabia not only decided
to boost production about 10 million barrels a day again, but slashing prices from $4.00 to $7.00 a barrel for its preferred customers,
particularly in Asia where that demand has been strong before this coronavirus kicked in.
Something happened between Friday night and Sunday though, Julia. I spoke to our senior Saudi sources on the phone on Saturday morning. They said
look, we were fighting with the Russians to try to call for price stability.
Once they said they were going after the U.S. shale producers, we had to reboot and think of our new strategy.
It really has the hallmarks of the new Crown Prince Mohammed bin Salman, let's not forget that the new Minister of Energy has been in the job for
less than six months is his half-brother, obviously both sons of King Salman.
This was audacious to basically boost production and then slash prices, and we're going back to the future if you will, Julia.
The OPEC Plus was created at the end of 2016 in the effort to bring price stability when prices collapsed to $30.00 a barrel.
[09:05:09]
DEFTERIOS: Lo and behold, with the correction between Thursday and Monday of 40 percent, we're right back where we started, extraordinary
implications globally for oil prices going forward.
CHATTERLEY: Absolutely brute force. I think audacious, another word, and you used that one, John, but to your point, this is not just about the
Saudis and the Russians, the United States, the shale players.
The United States, now the largest producer in the world, also stepping up sanctions on Russia in the last few weeks was there, of course, the oil
player in particular.
So everyone is looking at everyone else and going why should we be the person here to cut supply when everyone else doesn't feel the pain that we
feel? The problem is, $30.00 oil, everybody hurts, John. No one can sustain this for a long period of time.
DEFTERIOS: Yes. No, in fact, nobody wins at $30.00 oil and that would include the U.S. shale producers.
I would argue, Julia that this Russia chase of the U.S. shale producers is coming extremely late. We have some producers that are highly leveraged,
and this will tip them over the edge at $30.00 a barrel, but over the last 18 months, and this is something you know very well, we've seen all the
major international oil companies go into the shale basins of the Permian, the Eagle Ford in Texas, the Bakken in North Dakota, and I'm talking about
everybody.
ExxonMobil, Chevron, BP, Shell, Total of France ConocoPhillips, they've all gone in and they have much deeper pockets.
So I don't think having this fight to $30.00 a barrel is going to knock off a lot more shale production, although the leverage is certainly going to
bubble to the surface here, and then you have to look at the individual countries themselves.
Saudi Arabia is one of the low-cost producers at $2.00 to $6.00 a barrel. We've talked about it, but the breakeven price for their budget because
they spend so much is about $80.00 a barrel.
Due to the sanctions, the Russians have buckled down over the last five years and their breakeven price is $40.00 a barrel. Ironically, they have
about the same level of reserves, just over a half a trillion dollars. It is not a lot of money to be fighting into the open market when you had
three years of stability averaging around $50.00 a barrel, you decide to open the taps and let it fly and see who's going to survive at $30.00 a
barrel.
It is pretty serious ego fighting here between Moscow and Riyadh and having a bromance for three years between the OPEC Plus producers go up in smoke
almost immediately after that OPEC Plus meeting.
CHATTERLEY: The ultimate Clash of the Titans here. John, the question is, does it bring them back to the negotiating table? Because in the interim,
global markets are tremoring here.
John Defterios, great to have you with us. Thank you so much for that.
I want to talk about the global reaction here because of course the timing here, in light of the broader issues with the coronavirus outbreak, just
giving investors something else to worry about here in New York.
As I've mentioned Dow futures down more than 1,200 points that of course before the circuit breakers kicked in. Paul La Monica joins me now on this.
Paul, I mentioned that the circuit breaker is yet again, we simply don't know, but we can have a gauge or sense based on things that track the Dow
and the S&P 500 that we could see stock markets here open down some seven percent.
PAUL LA MONICA, CNN BUSINESS REPORTER: Exactly. If you look at the S&P 500 ETF, which is still trading premarket, it is down seven percent, Julia.
Same thing for the NASDAQ 100, the QQQs -- it is not going to be a pretty open.
That goes without saying, I think the question will be what we saw last week on Friday. Remember how we had that furious end of the day rally that
actually pushed the broader markets higher for the week even though we had all of that volatility last week. Stocks still finished in the black for
the week.
I'm not so sure we're going to get that buy the dip mentality today, because the fear levels are just so intense right now.
CHATTERLEY: I mean, Paul, you and I were talking about the bond markets last week and just saying that looking at that non-farm payroll report
versus the drop that we've seen in bond markets, particularly in the United States is completely nonsensical.
And yet here we are today, we've got us 10-year yields below half a percent. We've got the entire interest rate market curve, we're showing you
the 30-year there as well, falling, falling, falling.
LA MONICA: Yes, I think that there is going to be this continued flight to safety, and the question now becomes we've already talked about negative
yielding debt in Europe and Japan. Could it happen here? And I think there is a distinct possibility that if this flight to safety continues, that you
are going to see bond yields continue to plunge and investors are obviously very nervous right now.
The question becomes, what more can the Fed do? We've seen the New York Fed take some actions this morning. Will the Fed, when it has its regularly
scheduled meeting next week, how aggressively will it cut rates? Will they even wait until next week, if things get even more intense with this
selloff?
[09:10:14]
LA MONICA: I don't think it's out of the realm of possibility that the Fed steps in with another emergency cut before the meeting next week as they
may feel that waiting until March 18th could be too long because things are so fast and furious right now.
CHATTERLEY: I think we'll also be looking at the credit markets here, the borrowing markets, to your point, too, particularly for some of the most
risky companies around the world that have already charged relatively high interest rates to borrow money.
And there was a lot of discussion in the financial press over the weekend about how much pressure the collapse in oil prices, but also the ongoing
stress and share price falls.
We'll have all of the riskiest companies in the world, including in the United States that have simply more leverage than they were five to 10
years ago.
LA MONICA: Exactly. I think the big concern right now is that even though the banking system is arguably in much better shape now than it was at the
height of the 2008 credit crisis and Great Recession, a lot of other companies in corporate America have taken advantage of those already low
and continuing to fall interest rates to load up on debt.
So if we do have a debt crisis, Julia, I think it's not going to be the banks, but it's going to be just about every other industry in the United
States and the oil sector is probably going to be the first to really get hit extremely hard.
Because as you point out, you've got their share prices falling, the commodity price that bolsters up their share price is falling as well. So
it's very bad news for energy companies right now.
CHATTERLEY: Yes, the question is, how long do they have before they need to refinance or roll over that debt? Short term, perhaps you can handle it.
Medium to longer term, incredible stress. Paul La Monica, great to have you with us. Thank you so much for that.
All right, we talked about it already, but I do want to bring you up to speed now with the latest on the coronavirus outbreak.
Almost 16 million people and now under lockdown in Italy, one of the toughest containment measures outside of China.
In Modena, six people died after a prison riot triggered by visiting restrictions.
In Portugal, the President has placed himself under quarantine after contact with a class from one school where a student has tested positive.
Meanwhile in the United States Senator, Ted Cruz has done the same offer an interaction at a Conservative Political Action Conference.
In the U.K., they're holding another emergency meeting after cases there spiked over the weekend.
Meanwhile, in China, Disney has reopened some facilities at its Shanghai resorts, so a real mixed bag, but I do want to go to Italy now to get the
latest from there.
Delia Gallagher joins us from Rome. Delia, just give us a sense. We're talking around just shy of 25 percent now of the population under some form
of restriction here. What more can you tell us?
DELIA GALLAGHER, CNN CORRESPONDENT: Well, I can tell you, Julia that these restrictions really have affected the entire country, not just the North
that is on lockdown, because as of Sunday, even in Rome and in other parts of Italy, we have schools that are closed, museums that are closed, all of
the social events that people would normally attend are closed.
So obviously, the knock on effect economically for tourism, but also for local businesses is a concern throughout the country. But yes, in the
lockdown areas, there is now the issue of enforcing this lockdown.
The Interior Ministry this morning announcing that they will be in train stations, in airports, on the roads, asking people where they're going and
why, encouraging people if they do not have a really urgent reason to move, that they shouldn't do that.
There are fines up to 200 euros and even jail time if people do not abide by these restrictions. The Interior Ministry also announcing that in
Venice, tourists will not be allowed off of cruise ships there.
So you can imagine that for Venice, again, tourism an important part of their economy. So it brings us back to the question of the economy and of
the difficulties in the short term, at least that Italy will be facing.
CHATTERLEY: And what are the governments saying about potential stimulus measures? Because Italy is certainly one of the countries that we've been
following as already teetering on the brink of recession.
This is simply the last thing that Italy needs, particularly when they don't simply have the capacity to stimulate the economy here, perhaps like
they would have done in the past.
GALLAGHER: Well, the government has announced that they're allocating 7.5 billion euros to this effort and the Finance Ministry this morning
announced that they will be helping those industries that are going to be hardest hit -- tourism, hotels, restaurants, and so on -- helping them to
subsidize.
[09:15:00]
GALLAGHER: Because as we were speaking, for example, to a restaurant owner just yesterday, he has a hundred employees, and he's here in Rome. So he's
not even in a lockdown area, and he is concerned because of course, even Romans aren't going out as much to places and he's concerned about what he
does with his employees and having to lay them off.
But Italy does have some worker protections, and so hopefully those subsidies can come in and help at least in the short term some of these
industries that are going to be hardest hit by an economic downturn -- Julia.
CHATTERLEY: Thanks so much, Delia Gallagher. Great to have you with us. Joining us from Rome.
Clearly, what global investors are doing are mapping mirroring what we're seeing in Italy and the draconian measures there and wondering if that's
going to be needed in other countries, including countries like here in the United States.
Ray Dalio, the founder of Bridgewater today in an op-ed calling for coordinated stimulus here -- monetary and fiscal.
President Trump has been tweeting this morning several times, neither on oil though, nor on the market pressure that we are seeing.
Christine Romans joins me now. Christine, two clearly huge issues now for the market to deal with. The crisis that we're seeing in the oil markets,
the ongoing issue with coronavirus. And I have to say Ray Dalio at this point saying, it is needed, coordinated stimulus is needed. He doesn't
expect it.
CHRISTINE ROMANS, CNN BUSINESS CHIEF BUSINESS CORRESPONDENT: Yes, and I'm hearing an awful lot of calls this morning about discussions for bailout of
the airline industry. What kind of additional targeted stimulus can the White House convince Congress to do that would include maybe tax breaks or
lifting of tariffs temporarily, or other temporary measures like paying sick leave for people who have to stay home?
There are a lot of ideas about there, about more juice and more stimulus this needed. The President is tweeting some couple of dozen things
unrelated than that.
So the question is, where is the leadership coming from Washington? Is there an appetite for coordinated global efforts to get this under control?
And where is the leadership?
You know, there's a lot of fundamental things happening. This oil crash overnight really has added to what has already been a dire mood. If you
look at this 10-year note yield, and you know, I'm telling you -- I just never thought I'd be saying, you know, 0.44 percent for the 10-year note
yield. I mean, it just seems almost unbelievable.
The President in the past several days has again, called on the Fed to do the work, you know, stimulate, to keep cutting rates, but the Fed is like
Atlas, you know, how long can the Fed be, you know, with apologies to Mohamed El-Erian, the only game in town.
You know, the Central Banks for a decade, have been the stabilizers for the economy without much room left to go to be honest, without actually
Congress broadening their mandate.
So we are, I think Julia, at a kind of a dangerous moment this morning. When you look at the bond market, you look at the oil market, and you look
at the stock market that appears like it will hit circuit breakers in the very early going here.
CHATTERLEY: Yes, I mean, the only benefits of that monetary policy here is it's simply quicker. You can cut rates quickly. You can do things quicker.
And the fiscal policy takes time, whether it's raising money, whether it's coordinating, but I think to your point, we're very much glass half empty
hereto.
We're not hoping, we are not foreseeing an end to the coronavirus, even if we're seeing things coming back to normal to some degree in China here and
as far as the oil markets are concerned, there will be benefits to consumers of lower prices.
But that's being swamped, well and truly by recession fears. And that's the key here. Somehow we have to stop this downward spiral.
ROMANS: Yes, the concerns too about some of the shale producers who are on the brink already. And this will mean layoffs in Texas, and in Oklahoma.
Look, markets always overreact. We know that. If you go back to this very day -- this very day -- 11 years ago, it was as dark as right now, if not
more dark. Remember? But that was the beginning of the longest bull market in American history. This is the birthday of the bull, I am not going to
pull out any cake because it doesn't feel right to kind of celebrate it.
But, just a reminder that you know, the stock market, the S&P 500 has more than quadrupled over the past 11 years. This is, however, its most
significant test.
CHATTERLEY: And we'll see. Do they manage to meet that test? Christine Romans, great to have you with us. Thank you so much for that.
There's only one story here, it's coronavirus, of course and its pressure - - global pressure on markets -- the epicenter of what we're seeing with that oil price crash today. We'll have plenty more to come on FIRST MOVE.
Don't move a muscle. We are back after this.
(COMMERCIAL BREAK)
[09:22:37]
CHATTERLEY: Welcome back to FIRST MOVE live from the stock exchange. An unprecedented day it feels in global markets. Once again, I can give you a
look at what we're seeing with U.S. futures, but they are limit down. That means we fell five percent plus premarket and then trading was halted by a
circuit breaker.
So we're really only going to get a sense of how U.S. markets are trading when they open up in around 10 minutes' time.
ETFs - Exchange Traded Funds that track the S&P 500 are currently down more than seven percent. I'm just looking at what's going on in the European
session, too.
We've got the French markets down over eight percent as well. So that's giving you a sense.
What about pressure though on currency land? Some of the oil producing nations I'm showing you now, the U.S. dollar up some five tenths of one
percent versus the Mexican peso. Oh, but the Russian ruble down as you can see over three percent. The dollar up versus the Russian ruble, again, the
epicenter of what we're seeing here in the oil markets.
I can also show you the Norwegian kroner, another big oil producer, of course, that's fallen to its weakest level against the dollar since 1985.
What about the safe havens here? The Japanese yen up some 1.8 percent versus the U.S. dollar. Gold also benefiting here as you would expect
hitting seven-year highs, up some seven-tenths of one percent.
Let's bring it back to what we're seeing in the oil markets, though, some of the major oil companies are poised for a deep selloff in the U.S.
session as well as oil prices plunge more than 20 percent. Look at that, Occidental, they are down 39 percent premarket; Chevron, off some 17
percent.
Wow, it's going to be an interesting trading session. Let's get some context. Ruchir Sharma, Head of Emerging Markets and Global Chief
Strategist at Morgan Stanley Investment Management joins us now. He is also the author of the book "The 10 Rules of Successful Nations."
Wow, some successful nations are even under pressure today here, Ruchir, what do you make of what we're seeing?
RUCHIR SHARMA, HEAD OF EMERGING MARKETS AND GLOBAL CHIEF STRATEGIST, MORGAN STANLEY INVESTMENT MANAGEMENT: Well, I think that what's really going on
is this that you have a global debt bubble, which is meeting a once in a century epidemic. And this is the result that we're getting here.
I think that this is something which is not properly understood, which is that we have had this massive buildup in corporate debt from America to
China driven by very low interest rates over the last decade.
The assumption was that as long as interest rates stayed low, this debt could be serviced.
[09:25:11]
SHARMA: What the models did not take into account is what if you get a sudden shock to your cash flows? And I think that's what's really going on
out here. That we've got a sudden shock to the cash flows. We don't know how long this is going to last.
For a while, the Wall Street was working with the historical templates, which they were looking at the past global health emergencies. They
typically lasted for about three to six months and after that they washed away.
Remember, in the last century, we've had about eight of those global health emergencies, not one has caused a global economic recession, not one.
The difference this time is that we got this massive global debt bubble and global debt is very high and corporate debt needs to be serviced all the
time, and if markets shut down or you get a confidence hit, then you end up getting this vicious cycle that we are starting to see over the last few
days.
CHATTERLEY: You have to make monthly or semi-annual repayments on debt, and if suddenly your business switches off overnight, and you're not
selling anything, you don't have the cash flow to make those payments. It's that kind of trigger and instant trigger even as we see global bond yields
coming lower.
I think for most people, that's confusing. We have around --
SHARMA: And you've got government interest rates, but in the bond market, the credit spread as the technical term is those are widening a lot.
CHATTERLEY: Borrowing cost of corporates.
SHARMA: Exactly. And there's a second element here, which is that the high yield market, the junk, you know, sort of markets, the issuance there is
virtually shutting down.
So you do not only have widening spreads, but you also have the scope for new issuance declining very rapidly, and so that means a lot of companies
which are forever reliant on more borrowing, they can't go onto the market and keep borrowing.
CHATTERLEY: We're going to discuss this. The market open is next. We're expecting a really tough one. Stay with us. A couple of minutes time, the
market opens next.
(COMMERCIAL BREAK)
[09:30:06]
CHATTERLEY: Welcome back to FIRST MOVE live from the New York Stock Exchange and the opening bell rung by Citi's women celebrating
International Women's Day. No time to talk about that, quite frankly.
I want to give you a look at what we're seeing. It was limit down premarket of course, for the U.S. markets this morning and the delay that we're
seeing even, yes, I have to say this is expected.
The delay that we seem to be seeing here, remember is because we will limit down. There is the picture.
So we are now down more than seven percent for the NASDAQ. We are approaching seven percent for the Dow, 6.6 percent. Remember, the NYSC will
halt trading for 15 minutes if stocks fall some seven percent. So that's what everybody is watching very closely here.
What we're also seeing though, losses of more than 10 percent for the major oil stocks. No surprise, given the pressure that we're seeing in oil
markets.
Also, for the major U.S. financial institutions. The Dow is now down more than seven percent. The S&P 500 inching closer.
So this is, second by second, what will be going on here is that they will be watching, watching and waiting for that seven percent touch to hit and
then we'll be suspended for 15 minutes.
Ruchir, what stops this?
SHARMA: There's only one variable worth watching just now, which is what is the increase in the number of new cases being reported, the sort of
growth rate on that, because I think that's the one thing that we learned from China, that the confidence begins to return, the moment that number
sort of peaks and the number of new cases being reported, the growth rate of that sort of turns around.
So that for me has become the only variable worth watching because as long as that is on an upward trajectory, it's going to be very difficult to
restore confidence anywhere.
CHATTERLEY: What about fiscal stimulus? What about coordinated monetary policy as Ray Dalio suggested this morning.
To your point, it simply is about counting cases and seeing measures to try and contain the spread of the coronavirus. Can stimulus help?
SHARMA: Yes. I think it depends what sort of stimulus. Just cutting interest rates isn't enough. I think what you will have to do now is get
more liquidity actions to help the markets function, and this is where you need greater coordination from not only Central Banks, but even the U.S.
Fed and the U.S. Treasury, with the limits to what the U.S. Fed can do.
Like in 2008, it will require coordination between the Fed and the Treasury. I think that's the phase of this panic we are now moving into.
CHATTERLEY: I want to get back to what you were saying about the high yield market and these companies, these more risky companies that have
already borrowed at far higher cost than the rest of the market. How long can they survive with the kind of pressure that we're seeing on markets
with oil prices under pressure, particularly for that 10 percent of the high yield market that is energy companies?
SHARMA: The system is quite fragile. Because, you know, there's one statistic which I always sort of keep at the back of my mind that today, in
the U.S. itself, 16 percent of all companies listed are classified as zombie companies.
These are companies that don't even earn enough cash flow to pay their interest payments. So they have to constantly keep sort of borrowing to
keep alive.
So the key is this, that if this upward trajectory in global cases continues for more than a few weeks, I think that we really have a serious
problem. We have something which is close to a global financial crisis, if that continues.
So that's why I said, the next couple of weeks, we need to see that sort of escalation we're seeing just now in the number of new reported cases
globally to sort of come off because that's what we saw in China.
So the only hope here is that at least in China, there is a template that's happened. But remember now in China, they're concerned about the reverse
feedback loop. They are concerned that what happens when their end demand sort of collapses, and their exports go down.
So this is what the problem is with this epidemic, which is that it is happening in waves. It's not like past epidemics, which is one shock going
from country to country to country. It's happening in waves.
CHATTERLEY: We've seen Italy over the weekend, and I think this shook investors announcing finally draconian measures to contain this, and I
think for a lot of investors, they're going is that what's going to be needed in countries like the United States?
Okay, the reason why we just heard the bell is because now the S&P 500 is down seven percent. So that's kicked in a halt. We will now be halted for
15 minutes. The markets will then reopen.
The next downside point is 13 percent, at which point another halt will be called and will kick in. So that is a circuit breaker that's just kicked
in. We're now suspended for 15 minutes.
SHARMA: Yes. This is --
CHATTERLEY: Unprecedented times.
SHARMA: Exactly. This is very brutal and I think -- it is always that line that when sorrows come, they don't come in single spies, they come in
battalions. And I think that's what's going on that the weekend developments --
And you know, this all sort of is part of the same theme, one which was spoken about earlier of de-globalization.
CHATTERLEY: Yes.
[09:35:24]
SHARMA: Where we see the world much more fragmented, the breakdown between Russia and Saudi Arabia, different models that you sort of want to have out
there.
So it is part of the same theme, but it's playing out all together and that's what sort of makes this a global panic.
CHATTERLEY: I mean, it is a panic, too, to your point, and it goes back to exactly what you're saying about the number of cases.
We can't get a grasp on how to price what looks reasonable for the economic impact here, which is also why people are looking at the markets and trying
to gauge have we priced enough downside in here, whatever market we're looking at here, and we simply can't do that at this stage.
SHARMA: Yes, and you have like feedback loops. One thing which have always been raised a lot of concern about is that the size of global financial
markets today is four times the size of the global economy.
So it's now the tail that wags the dog. The global financial markets have become so much bigger than the global economy that the feedback loop now is
in the reverse.
So we are talking about pricing in -- not pricing in -- this is you've got a confidence shock to this big beast, which is four times bigger than the
underlying economy, and if that begins to sort of go down, there's a feedback loop back to the economy. So that's how these vicious cycles
develop.
CHATTERLEY: Are you confident enough at this stage to say this is an overreaction?
SHARMA: No.
CHATTERLEY: At this stage? Or you're expecting more downside?
SHARMA: Yes. In terms of it is impossible. As I've said, that we've all become in a way amateur epidemiologists.
CHATTERLEY: I know.
SHARMA: We are all -- you know, we are all trying to figure out how this is going to wane. But until you get confidence that there is under some
semblance of control globally, it's going to be very hard to get confidence in the fact that this crisis is behind us.
CHATTERLEY: Ruchir, great to have you with us. Thank you so much for bringing your wisdom today. The Head of Emerging Markets and Chief Global
Strategist at Morgan Stanley Investment Management.
As you can see, the Dow down more than 7.2 percent. Take a look at all 30 Dow components. Let me give you a look at what we're seeing here.
Yes, it's a sea of red on the downside as you would expect the likes of Chevron, ExxonMobil, of course, the big oil players seeing significant
impact here. The cruise stocks, travel, of course, as well.
The financials -- I am pulling out Goldman Sachs, JPMorgan -- all down some 10 to 11 percent.
Clare Sebastien joins us now on this. There is no safe haven when you're looking at these stocks. We've had a trading halt of course, called here at
the New York Stock Exchange. These are significantly pressured markets, Clare, wherever you look.
CLARE SEBASTIAN, CNN BUSINESS CORRESPONDENT: Absolutely, Julia. Goldman Sachs put out a note -- it was interesting -- just after the close on
Friday saying during the selloff, only 19 S&P 500 stocks have actually grown.
I think you may see that number come down somewhat today. We're seeing sort of safety being redefined. They also listed some 20 sort of secular growth
companies that they usually see as sort of a safe haven within equities.
They are also, some of them down, some 20 percent throughout this selloff and one of the hardest hit areas, Julia that we're seeing today is the
cruise lines.
They have been the epicenter of this before today's trading. They were down, you know, give or take some 50 percent since their peaks in mid-
January, down again today, you know, 10 percent for Carnival, 15 percent for Royal Caribbean.
All of this around the headlines that we're seeing the administration warning people simply not to go on cruises. We're seeing Mike Pence over
the weekend meeting with the cruise line leaders coming up with a plan to increase entry and exit screenings.
It's also not just in the U.S., Egypt, for example, is conducting random medical checks on passengers on cruise ships in Luxor, so this is an
industry that is really sort of feeling the impact of this.
It was at the frontline of the very beginning like all of travel, it continues to see these negative headlines. It's hard to imagine anyone
booking a cruise under these circumstances.
And meanwhile, of course, we are seeing real impact on people. The passengers of the Grand Princess being evacuated today, some three and a
half thousand of them, of which 21 have tested positive for the virus.
So a real hit to the cruise industry to their confidence, Julia, as well as real impact.
CHATTERLEY: Yes. Absolutely on with the fall in bond yields that we've seen and bond prices rallying, the financials, of course, at the epicenter
of this, too, but no one is spared.
Clare Sebastian, great to have you with us. Thank you so much for that update there.
Just to remind our viewers, we are in a trading halt at this moment. The circuit breakers kick in when markets fall some seven percent, and that is
what we've seen.
There's plenty more to come. We'll take a look at what we're seeing in terms of pressure on the oil market. Pressure too on oil stocks. That
impact of course and the spread of the coronavirus globally.
Pressure, volatility, the name of the game. Stay with us. We are back after this.
(COMMERCIAL BREAK)
[09:43:08]
CHATTERLEY: Welcome back to FIRST MOVE where trading is currently suspended. The New York Stock Exchange's three-tier circuit breaker has
kicked in to put a floor under stocks after a seven percent fall at the open.
Peter Tuchman is a floor broker at Quattro M. Securities and joins us now. Peter, I know you're incredibly busy.
PETER TUCHMAN, FLOOR BROKER, QUATTRO M. SECURITIES: Yes, Julia.
CHATTERLEY: Talk me through how this works.
TUCHMAN: So obviously over the weekend, the markets around the world got decimated. Definitely, the oil is what took down the next leg, but
obviously we installed circuit breakers here a number of years ago, I'm not sure whether it was --
I'm not sure when they actually started it. But obviously it's to protect the market from getting super emotional about, obviously down markets. We
have them you know, I mean, I'm excited --
CHATTERLEY: It's to prevent a panic, basically.
TUCHMAN: It is to prevent a panic. It gives people 15 minutes to disseminate the information. Hold back for a minute. We have also other
things in place where if the market goes down 10 percent from the opening, you've got things that go into slow mode electronically.
CHATTERLEY: So we're going to open again, after a 15-minute pause. Then what?
TUCHMAN: Basically, we opened down seven percent, it took about a minute or two to get everything open. That took the SPX down to 2,764, spot 33,
which was the exact number.
CHATTERLEY: Yes.
TUCHMAN: And when we halt and basically we're going to slow down, people are going to get a handle on it. Everyone who wants to be a buyer gets
involved, who wants to be a seller. It gives people a minute to dislocate from the emotionality of it all, to realize where the bodies are lying
unfortunately -- sorry, bad term.
CHATTERLEY: No, but I understand. Just give us a sense of where the circuit breakers will kick in again, once we open up --
TUCHMAN: So, I believe the number is like 25 -- another down 13 percent, it will kick in again for a 15-minute halt. Same premise, and then another
five percent, I believe, we're going to halt for the day.
So the whole point is to prevent really, really a run on and panic and emotionality about the markets. It gives people a moment to really just
calm down, see where they really want to be, obviously, the markets here are in deep fear panic mode.
[09:45:09]
TUCHMAN: You know, it's virus, it's oil, and it's panic.
CHATTERLEY: There's a lot going on. Peter, fantastic to have you with us.
TUCHMAN: Good luck, everyone.
CHATTERLEY: Get back to work, sir. Peter Tuchman.
TUCHMAN: Okay, bye, guys.
CHATTERLEY: Quattro M. Securities. Great to have you with us. Oh, he is off. Okay.
Let me just give you a look of what we're seeing here as Peter mentioned there. Oil, the epicenter of the pressure, at least for today.
The crude market has plummeted. We are seeing the biggest fall in crude prices since the Gulf War of 1991. Saudi Arabia launching an effective
price war with Russia, but as well with the world.
Rob Thummell joins me now. He is managing Director and Portfolio Manager at Tortoise.
I called it one heck of a message, not just sent to Russia here because they wouldn't come in on output restrictions here, but also to the United
States now, the world's largest producer. The question here for me, Rob is does this bring everybody back to the table?
ROB THUMMELL, MANAGING DIRECTOR AND PORTFOLIO MANAGER, TORTOISE: Yes, Julia, so how did we get here? So we got here this way. But effectively, we
have a global oversupplied oil market, right? Because obviously the coronavirus is reducing demand.
Everybody thought that OPEC and Russia would reduce production to reflect that lower demand. And instead, Russia is deciding to increase production.
And so now we've got too much production. So what do we do?
The U.S. is going to have to react. They're going to have to cut capital, be disciplined, reduce production themselves, and if you think about it in
context, we're probably over supplied by one or two million barrels a day.
The global oil market is 100 million barrels a day. So we're probably only one or two percent over supplied -- big picture. So this can be rectified.
CHATTERLEY: It can be rectified. But in the interim, everybody hurts. Nobody can exist with oil prices trading in the $20.00 to $30.00 a barrel
region.
Russia, arguably coming into this is more comfortable around what? $40.00 to $50.00 compared to the Saudis who we were just discussing earlier on the
show, more comfortable at $80.00 a barrel. How long can this go on for? This standoff?
THUMMEL: Yes, that's exactly why prices at these levels cannot last for very long. They're temporary. You highlight it and you're exactly right.
Russia needs $42.00 a barrel. The Saudis have had seen their cash reserves cut by a third from 2014 to today. At this rate, Saudi cash reserves will
decline by 50 billion to 100 billion a year. They only have 500 billion right now.
So as a result of that, that's why this is temporary. This will be temporary. We will see the reactions of really across the world. But it
will start in the U.S., we will see U.S. producers start to slow the rig count, reduce capital that will result in lower production that will bring
back Saudi that will bring back Russia to the table and we'll get to a more realistic oil price, which is probably in the $40.00 to $50.00 range.
CHATTERLEY: Talk to me about some of the shale players here too, because if I throw my mind back to 2016, we were looking at some of these more
risky companies, we were concerned that their borrowing costs would spike that some of them simply couldn't take the cuts in capacity and the fact
that they weren't breaking even. It was simply not economical to pull oil out of the ground at these price levels.
How quickly do we see significant reduction in those players in particular? I'm talking businesses going out of business.
THUMMEL: Yes. So Julia, think about it this way. There are 9,000 producers in the U.S. Now, none of them are all publicly traded companies, but there
are 9,000 total producers.
Over the last several years, and this year in particular, there has been a movement towards capital discipline. And what that means is the producers
were trying to reduce their capital to have it match their cash flow.
Well, obviously with the oil price, their cash flow now has just declined. So what do they need to do is reduce capital even more.
So over the next probably six-month period, you're going to see the U.S. oil rig count decline week after week after week, just like we saw in other
periods when we've had this similar decline in oil prices.
When that happens, then you'll see production shortly after that start to fall as well. Once again, that's the key. It is declining rig counts,
declining U.S. production that will be where we'll start to see oil prices begin to rise again.
And we can see that probably anywhere in the next three to six months.
CHATTERLEY: Rob, very quickly -- and that's trading just started. So we'll watch what happens now with the stock market prices. We're already seeing
further selling pressure, so it's going to be very important just to watch what we see now.
We've had a 15-minute delay. Stocks have been halted. Trading has been halted because we saw that initial seven percent decline.
Now we wait and see because trading is back up and running. The next circuit breaker kicks in at 13 percent. The declines we were just speaking
to Peter Tuchman about, so we'll continue to watch stocks.
[09:50:04]
CHATTERLEY: Rob, very quickly. I was mentioning, it's a U.S. election year. This President is very sensitive to stock markets. He's very
sensitive to the geopolitics of the situation at this moment.
He has wanted -- let's be clear -- oil prices lower, but clearly not to the point where businesses and jobs in the United States are at risk.
Does the U.S. here play matchmaker talking to the Russians and to the Saudis to try and bring people back together to support prices here for the
good of all?
THUMMEL: Well, so real quickly, so we think going forward, you're going to need -- the oil markets globally are going to need Saudi Arabia, Russia and
the U.S. It's not an either or it's an and-both.
We're going to need all of those parties to keep the oil markets balanced over the long term over the next decade and probably the decade after that.
So yes, it's really important. The energy industry has been a really significant driver of the U.S. economy and can continue to be. The U.S. is
the largest oil producer in the world.
So yes, we think it would be very important that these three parties come together, come to a resolution and get the oil price to a more reasonable
level that's beneficial for all parties instead of a level that's detrimental to all parties.
CHATTERLEY: Rob, great to have you with us. Rob Thummel there. Managing Director and Portfolio Manager at Tortoise. Great to get your insight.
Thank you.
Let me give you a quick analysis of what we are seeing on the market. You can see the Dow at this moment down 1,949 points. We are at session lows at
this moment, down some seven and a half percent.
We have been halted for 15 minutes. The market has now reopened. So it's just simply a case of watching the price action here, watching pressure
from sellers whether we get buyers back in to support prices, or whether we push lower from here.
Right now, you can see the Dow off some 7.8 percent and we're holding for at least this moment at these levels.
Matt Egan joins us now. Matt, a combination of things here. The pressure, as we were discussing there on oil prices creating a panic, a fear
overnight in markets. We had premarket at halt.
People are now just getting a sense of the level of selling pressure here and the reluctance from buyers to come in here and support these markets.
MATT EGAN, CNN BUSINESS SENIOR WRITER: That's right. I mean, we're seeing a 2,000 point drop on the Dow, nearly eight percent. Clearly, Julia, this
is the biggest test facing what is the longest bull market in U.S. history.
This is clearly a health crisis and it is morphing right before our eyes into an economic crisis. Clearly, the travel industry is just getting
crushed by the coronavirus fear.
We've had cruises and flights canceled and that is causing real pain there. But also, we're seeing all this weakness in overseas economies like Italy,
which has had to shut down large parts of that country because of coronavirus.
And then the big wildcard, Julia, is consumer spending. What does this do to consumer psychology? And it's easy to see how American shoppers and
really shoppers around the world might be less willing to spend money during this coronavirus outbreak.
And that's the real problem because U.S. consumer spending has been the bright spot of the U.S. economy, if not the whole world economy. And so
there is a rising concern that this will be a severe economic slowdown in the United States, if not a recession.
And for all we know, Julia, we might have already -- we might already be in recession.
CHATTERLEY: And that's a great point, too. Right now, we are bouncing slightly down from 7.1 percent. So a little bit of stabilization taking
place at this moment. It's clearly early days.
We are only 30 minutes into this trading session, but at this moment, we've gathered, we've bounced off the lows, we're gathering a little bit more
momentum here.
We're down still, though some seven percent on the Dow. To your point about the recession fears here, we have to look as well, not only at what's going
on in stock markets and in oil, but also in the bond markets, too.
We've seen significant inflows into the U.S. bond markets in particular that 10-year yield below half a percentage point here.
I mean, that's a signal of recession fears, if ever I saw them -- Matt.
EGAN: Absolutely, you know, it's just amazing how quickly we've seen the 10-year yield come down. I mean, just maybe six months ago, we were talking
about how surprising it was to see the 10-year below two percent, and now it's well below one percent.
Clearly, investors are pricing in economic trouble. They're taking money out of stocks, and they're putting them in borrowing bonds, even though
these U.S. Treasuries are offering very little to no returns.
We're also seeing money go into gold as well and gold miners. That's again, it's another sign of concern.
The moves in the oil market though, Julia have just been stunning. I mean, we're talking about potentially the worst day for oil prices since 1991.
[09:55:10]
EGAN: Investors were hoping that Russia and Saudi Arabia would come to the rescue and cut supply in the face of this demand destruction caused by the
coronavirus.
Instead, we've seen the opposite, no agreement for further supply cuts and Saudi Arabia has signaled that they will actually ramp production and
they've effectively started a price war.
So that oil shock is just another major wildcard that is contributing, if not really leading the volatility today.
CHATTERLEY: And it feels like there's plenty more to come. Matt Egan, great job. Thank you so much for that.
We are looking at the Dow down some 6.8 percent at this moment. It looks like that 15-minute trading halt, at least for now gave people a pause for
thought.
At this moment, we are now down 6.6 percent, so the whole point of having that circuit breaker that 15-minute pause, as we were discussing earlier on
in the show is just simply to give people a moment to breathe, a moment to reassess.
And that does look like it's established a degree, and I say this with caution, a degree of stabilization in the market.
We are now down some 6.3 percent. So we are bouncing off the lows here. I feel like this market is simply going to be a minute by minute move, quite
frankly, I think, Rob, you're back with us, actually. Rob.
We were talking to you earlier. I have to say it's tough to see stabilization in the broader markets when you see such significant pressure
on the oil markets at this moment. It's tough to see anybody calming down here really?
THUMMEL: Yes, no, you're right. Julia. You know, the oil markets -- historically the investors have thought about the oil markets and said if
oil prices are low, that means there's something wrong in the global economy somewhere.
Keep in mind though, since shale, that's changed this. This is not an issue with -- well, with coronavirus, there's a temporary issue with demand. But
the bigger issue, the longer term issue here and why Russia and OPEC and Saudi Arabia in particular could not come to an agreement is because of the
supply -- the supply.
And it's not -- so it's a little different than historic norms. It's it's more of a supply issue. Once again, supply can be adjusted, right. In the
last downturn in prices, U.S. oil production declined by 1.1 million barrels.
And so something like that will definitely help to improve the supply, less supply means better prices.
CHATTERLEY: Now, you make a great point that we're now fearful not only at the Saudi Arabians stepping forward and saying look, we're going to cut
prices and we saw that over the weekend for the Chinese buyers, but they're also threatening more supply and to your point, it comes at a time though,
even if we can't argue weak conditions at this stage, it comes at a time when we're dealing with demand destruction or potential demand destruction
related to the coronavirus outbreak.
So it's the two factors here simply that that investors and markets can't deal with. It's so difficult to gauge.
THUMMEL: That's exactly right, and the difference in behavior, right? This is a bit of a -- well, it's not a bit of, it is a significant change.
It is in fact 180 behavior change for OPEC and Saudi Arabia, at least on the oil side as typically if demand is going to fall, OPEC is the first to
adjust and now, instead OPEC is saying no, in fact, we're not going to decline. We're going to reflect this. We're going to actually increase.
Investors don't know what to think about that. So basically, they sell the news immediately panic, but what I'm here to say is, keep in mind this
oversupply is one to two percent of the global oil market. This can be rectified. It can be rectified very easily. And will be rectified in a
matter of time.
CHATTERLEY: It's such an important point, Rob. To your point about one to two percent over supply from this market and we've discussed this already
and the ability, the speed at which the market can adjust for that.
Is this an immediate overreaction in markets and where should prices live based on Saudi Arabia's threats over the weekend, and the speed at which
producers can adjust?
THUMMEL: Yes. So let me just give you an example. So if last Thursday when OPEC met, they recommended a cut of 1.5 million barrels a day in oil. The
IEA came out today and said, you know what, oil demand for this year and total is probably going to be about 1.1 million less than what everybody
thought.
So if we would have cut 1.5 on Friday, today, we would have said we had 1.1 less in demand, economics would have said, you know, oil prices probably
would have stayed right where they were in the mid-40s maybe even gone up a little bit because the market would have been totally supplied -- entirely
supplied.
[10:00:10]
END
