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Oil tumble hits equities, near bear market confirmation

An ashtray filled with cigarette butts is seen in front of a board showing currency exchange rates of the US dollar and euro against rouble in Moscow

By Chuck Mikolajczak

Global equity markets dropped to their lowest levels since 2013 on Wednesday to put them on pace for one of their worst monthly performances on record, as oil once again tumbled to 13-year lows.

The MSCI World equity index slumped 2.6 per cent to its lowest level since July 2013. The index has already dropped 11 per cent in January, which if sustained would be the worst monthly loss since October 2008, the month after Lehman Brothers went bankrupt.

The declines left the index down 20.8 per cent from its high on May 22, confirming a bear market on an intraday basis, generally defined as a drop of more than 20 per cent.

Wall Street tumbled more than 2 per cent, with each of the 10 major S&P sectors down more than 1 per cent, led lower by a drop of more than 4 per cent in the energy sector. Nearly 200 stocks in the benchmark S&P were down 20 per cent or more from their 52-week high.

The Dow Jones industrial average fell 358.34 points, or 2.24 per cent, to 15,657.68, the S&P 500 lost 43.99 points, or 2.34 per cent, to 1,837.34 and the Nasdaq Composite dropped 110.68 points, or 2.47 per cent, to 4,366.28.

There have been steeper monthly drops only four times in the MSCI World index’s 28-year history, two of which occurred during the financial crisis in 2008.

“The focus remains on oil and the impact of low oil prices, which points to slowing growth and possibly, even stagnant to negative growth here in the United States,” said Peter Cardillo, chief market economist at First Standard Financial in New York.

The Russian rouble struck a new record low yesterday as the falls in world oil prices deepened investor worries about Russia’s contracting, commodity-dependent economy.

The rouble was trading down 3 per cent at 81.01 to the dollar at 1340 GMT after earlier reaching a historic low of 81.07. It was 3.1 per cent lower versus the euro at 88.44 .

The previous all-time low was 80.10 roubles per dollar, reached in December 2014 when Russia was in the grips of a financial crisis exacerbated by Western sanctions over the Ukraine crisis.

Analysts said the rouble was likely to remain on the ropes as long as oil prices continue their decline but that the central bank was unlikely to intervene to defend the currency unless financial stability was threatened.

“The rouble is trading on oil and risk sentiment,” said Tom Levinson, chief forex strategist at Sberbank CIB, the investment-banking arm of Russia’s largest lender Sberbank .

US crude wallowed at its lowest since 2003 after the International Energy Agency warned the market could “drown in oversupply”. US futures plunged 5.2 per cent to $26.97 while Brent crude lost 3.8 per cent, to $27.67.

European shares touched their lowest level since October 2014, with the FTSEurofirst 300 down 3.4 per cent and set for its biggest single-session loss since the China-induced selloff in August.

Germany’s DAX, France’s CAC and Britain’s FTSE were all down more than 3 per cent and also heading for their biggest falls of the year so far.

Another key commodity, copper, slipped 1.1 per cent, driving falls of 4.2 and 3.9 per cent respectively in Europe’s basic resources and energy sectors.

Oil shares in Europe are down more than 14 per cent already this year and at their lowest levels since 2003. That has been a major weight on the FTSEurofirst 300, which is down nearly 12 per cent in 2016 and more than 23 per cent from its high in April.

The Nikkei share average shed 3.7 per cent to its lowest close since Oct. 24, 2014.

The safe-haven yen climbed as risk appetite soured, dragging the dollar to a one-year low, as investors trimmed the chances of more tightening by the Federal Reserve.

Demand for US bonds, another asset sought in times of uncertainty, was high, with yields on benchmark 10-year Treasury notes down to 1.9512 per cent, the lowest since August, up 25/32 in price.

While the dollar fell against the yen, it was strong against emerging market currencies, compounding the misery for many countries already suffering from low oil prices.

 

 

(Additional reporting by Abhiram Nandakumar; Editing by Nick Zieminski)

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