Live updates: U.S. markets recoil on new coronavirus, oil price threats

Treasury Secretary Steven Mnuchin and White House National Economic Council Larry Kudlow will meet with Senate Republicans at their lunch on Tuesday, according to two people briefed on the plans.

The meeting will come as the White House and Congress are looking at emergency steps to try and address the economic concerns that have arisen in the past few weeks tied to the virus.

The White House and congressional Democrats are both talking about whether to add new paid sick leave benefits for workers, though there is not yet agreement on how to move forward.

This is what panic selling looks like. When everyone wants to sell and almost nobody wants to buy, prices suddenly stop having much to do with the underlying value of whatever it is that is being traded. As the expression goes on Wall Street, nobody wants to try to catch a falling knife.

But it’s even worse than that when most of these stocks, bonds and derivatives have been purchased with borrowed money. The wiseguys who now dominate the daily trading on Wall Street — the hedge funds and private equity funds — typically put down $1 or $2 of their own and their investors’ money for every $10 worth of the securities they purchase.

What that means is that when prices for these securities fall 10 percent or 20 percent, the bank or hedge fund or private equity firm that lent the money for the original trade, or took the other side of the derivative contract, has the right to demand additional cash. The only way to get that cash is to sell something. And in that way, selling begets more selling.

Ultimately, all of these pieces of paper that are furiously being traded on financial markets are tied to some company or some household in the real economy. And that is where you run into the second problem. For it turns out that those companies and households also hold record amounts of debt, which makes them sensitive to any reduction in their sales or profits or normal income flows. So even the prospect of an economic slowdown causes them to save more and spend and invest less. While that is perfectly rational behavior on the part of any business or household, when everyone does it at the same time, it becomes something of a self-fulfilling prophecy, turning what might have been a modest slowdown in the economy into a full-blown recession.

When panic sparked by the coronavirus and a possible oil price war overwhelmed Wall Street on Monday morning, the ensuing sell-off was so severe that it triggered the New York Stock Exchange’s “circuit breaker” system. The system is meant to stop stocks in free-fall when they threaten to “exhaust market liquidity,” according to the NYSE.

Circuit breaker rules, which apply only during regular trading hours, stipulate that a single-day, 7 percent decline in the Standard & Poor’s 500 index triggers a forced 15-minute halt on trading. If the S&P 500 were to decline 13 percent, it would initiate another 15-minute freeze. A 20 percent decline would close markets for the day.

These circuit breaker thresholds were established in 2013, an overhaul of a previous system that failed to prevent the 36-minute, trillion-dollar flash crash in May 2010. The original system was put in place after 1987′s “Black Monday,” when a market plunge wiped out $500 billion in a single day — then the biggest single-day drop in history.

After the level one circuit breaker kicked in Monday morning, U.S. indexes rebounded slightly, only to sink back down to the same levels. By midafternoon, the Dow Jones industrial average was down more than 7.3 percent and the Standard & Poor’s 500 index was down nearly 7 percent. The tech-heavy Nasdaq was down 6.3 percent.

Senate Finance Chairman Chuck Grassley (R-Iowa) is looking at “targeted tax relief measures” with the aim of providing a “timely and effective response to the coronavirus,” a spokesman said Monday.

Committee spokesman Michael Zona said several options under the committees jurisdiction were being reviewed as they learn more about the impact on specific industries and the economy as a whole.

He did not specify what the measures might be. President Trump last week called for a one-year payroll tax cut as a way to address the economic fallout, but that idea has not been warmly received by many Republicans.

Industries including airlines, cruise ships and hotels have been hard hit by the virus and seeking relief from Congress and the White House. On Capitol Hill, Democrats are focused on worker-friendly protections like paid sick leave over help for corporations, setting up a struggle to reach consensus on any legislative package that could move quickly.

The oil price war Saudi Arabia launched against Russia over the weekend sent crude prices into one of the steepest falls in history Monday, a potential disaster for oil field workers, U.S. shale drillers, investors and members of the Organization of the Petroleum Exporting Counties that rely on oil to make their budgets add up.

Moscow’s refusal to cut its oil output by half a million barrels a day ruptured the unusual three-year marriage of OPEC, led by the Saudis, and major non-OPEC producers, led by Russia, as its members scrambled to find a way to respond to weakening global demand tied to the outbreak.

Saudi Arabia, angered by Moscow’s position, said Sunday that it would open its spigots and drive down prices, making this oil price cycle the only one in nearly a century to combine weak demand with a global price war.

Global markets opened down sharply Monday, with the leading benchmark varieties of crude tumbling more than 20 percent after other big falls in recent weeks. The drop was the steepest since prices plunged 35 percent Jan. 17, 1991, the day the U.S.-led coalition launched Operation Desert Storm to force Iraq to withdraw from Kuwait.

The plunge in prices, however, will also benefit consumers who should see markedly lower prices at the pump. For them, the price war will act like a tax cut, putting more money in the pockets of motorists.

White House officials have invited top Wall Street executives to meet this week as the coronavirus outbreak has created enormous strains on the U.S. economy, according to two people with knowledge of the meeting.

The gathering comes amid extreme volatility in financial markets. The stock market has fallen sharply in the past two weeks, many investors are seeking safe-haven in U.S. government debt, and the oil market has tumbling.

The White House’s agenda for the meeting could not be learned. The Wall Street executives invited to the meeting also could not be immediately learned.

The administration faces immense pressure to restore confidence in the U.S. economy amid one of the worst days on Wall Street since the 2008 Great Recession. President Trump and senior economic advisers have promised a quick economic rebound, but their optimistic forecasts so far have proved wrong.

Pick just about any market — stocks, bonds, oil — and it’s sending a signal that investors around the world think there’s a high probability of a recession.

J.P. Morgan sent around a note to clients late last week saying markets were indicating a 90 percent chance of a recession, a term that generally means six straight months of economic contraction. The picture looks worse now, especially in the bond market. Last week, Wall Street panicked when the yield on a marquee government bond — the U.S. 10-year Treasury — fell below 1 percent. That had never happened before. Now that yield is below 0.5 percent, a jaw-dropping situation that didn’t even occur during the Great Recession.

As he concluded meetings in Saudi Arabia on Feb. 23, Federal Reserve Chair Jerome H. Powell sent urgent emails to his staff about the coronavirus. The outbreak was escalating in South Korea, Italy and Iran, and the central bank needed to intensify its response to the economic shock.

While Fed economists began to run through scenarios of what could go wrong, senior White House officials both privately and publicly maintained that there was virtually no reason for concern. On Feb. 25, as Powell began meeting with staff to prepare contingency plans, White House economic adviser Larry Kudlow said the United States had an almost “airtight” containment on the outbreak, a day after urging investors to “buy these dips” in the stock market.

The coronavirus is threatening the economy, with supply chains stalling, tourism falling sharply and the oil markets plunging 30 percent on Sunday night. Yet U.S. economic leaders are divided about how to respond, with Powell and his Trump administration counterparts, Kudlow and Treasury Secretary Steven Mnuchin, differing in their assessments of the risks as well as the policies best suited to address the economic threat.

Not only do the Fed and White House appear to disagree on the severity of the potential economic hit, they’re at odds about the power of interest rate cuts to stem the panic. Trump and Kudlow have emphasized the Fed’s power to cut interest rates as the primary economic response to the crisis. But although they have moved to cut rates, Powell and others at the Fed have suggested that they have only a limited role to play, with some Fed officials arguing that spending or tax stimulus from Congress and the president would have a greater effect.

President Trump tried to rein in panic surrounding Wall Street’s meltdown in tweets Monday, even as he privately considered a menu of policy options to limit the economic fallout from the coronavirus. He blamed the sell-off on oil concerns rather than the virus’s growing presence in the United States and said the oil skirmish would be “good for the consumer.”

“Nothing is shut down, life & the economy go on,” Trump tweeted. “At this moment there are 546 confirmed cases of CoronaVirus, with 22 deaths. Think about that!”

Speaking to reporters on the sidelines of a women’s summit at Northeastern University, House Speaker Nancy Pelosi (D-Calif.) ascribed the stock market’s plunge to the uncertainty emanating from the Trump administration amid the coronavirus crisis.

“We would hope that what is coming out of the White House will be more consistent,” Pelosi said.

House Speaker Nancy Pelosi (D-Calif.) plans to meet Monday evening with key committee chairs to discuss legislation that could provide paid sick leave and other benefits to Americans hurt by the fallout of the coronavirus outbreak.

Rep. Rosa DeLauro (D-Conn.), a senior member of the House Appropriations Committee, told reporters on a conference call that Congress should move forward rapidly with an economic response package and talks are picking up in speed.

“I believe that this is precisely the direction we need to go in. There are the economic consequences from the crisis that are of equal concern as responding on the health care side,” DeLauro said. She added that “everybody is trying to move at warp speed.”

DeLauro floated the policy change to Vice President Pence last week and she said she was told he would present the idea to President Trump. It’s unclear precisely how it would work or what the potential cost might be.

White House advisers on Monday plan to present President Trump with a list of policy changes they hope could stem the economic fallout of the coronavirus, including paid sick leave and emergency help for small businesses, according to a senior administration official.

The menu of options is expected to be offered to Trump this afternoon when he returns from Florida. The list of potential ideas includes deferring taxes on specific industries hit by the coronavirus downturn, such as the hospitality and travel industries, as well as a “cashflow injection” for small businesses through the Small Business Administration.

The senior administration spoke on condition of anonymity and would not give more details about other options under consideration. The White House has faced intense pressure to arrest falling markets and stabilize an economy that investors increasingly fear may tip into recession. Many Democrats, meanwhile, are insisting that the government implement paid sick leave policies to help Americans who are forced to stay home because they are sick.

Oil prices tumbled below $35 on Monday after Saudi Arabia and Russia in a dispute over production.

The Saudis had been pushing to cut output to prop up prices but reversed their stance when Russia balked and instead decided to flood the market with hundreds of thousands of additional barrels per day at a steep discount — a move analysts fear may trigger a price war.

The Russians believe cutting production would open the door to more American competition by raising prices and reducing supply, said Mikhail Leontiev, a spokesman for the Russian oil giant Rosneft.

“From the point of view of Russian interests, this deal [to cut production] is simply meaningless,” Leontiev told the Ria Novosti news agency Sunday. “We, yielding our own markets, remove cheap Arab and Russian oil from them to clear a place for expensive American shale. And to ensure the efficiency of its production. Our volumes are simply replaced by the volumes of our competitors. This is masochism.”

The Saudi oil company Aramco is offering discounts of between $6 and $8 for delivery in April, it announced late Saturday. Its shares fell below their original IPO price on Sunday for the first time on the Saudi exchange.

″$20 oil in 2020 is coming,” Ali Khedery, a former U.S. official in Iraq and onetime Middle East expert with Exxon, wrote on Twitter. “Huge geopolitical implications. Timely stimulus for net consumers. Catastrophic for failed/failing petro-kleptocracies Iraq, Iran, etc. — may prove existential 1-2 punch when paired with COVID19.”

A production-cut agreement could still happen. An advisory-level OPEC meeting is scheduled for later this month, and the Russians have said they are open to further talks.