Over the weekend, U.S. Treasury Secretary Steven Mnuchin issued a statement saying that he “conducted a series of calls today with the CEOS of the nations six largest banks,” which included Bank of America, Citi, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo, and the bank executives “confirmed that they have ample liquidity available” for consumer and business lending operations. To which, the collective response from the whole world seemed to be: “Wait, who said anything about not having ample liquidity?”
Mnuchin also said that the major banks “have not experienced any clearance or margin issues and that the markets continue to function properly.” Again, since few expected otherwise, the “clarification” from Mnuchin only seemed to sow more fear and confusion.
Mnuchin was scheduled to hold another call with the President’s Working Group on financial markets – commonly referred to as the “Plunge Protection Team” – which includes the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission, and the Commodities Futures Trading Commission. He said that the FDIC and the Comptroller of the Currency might participate as well. “These key regulators will discuss coordination efforts to assure normal market operations,” Mnuchin’s statement said.
The curious statement intended to reassure the markets prompted the opposite response. “This is the type of announcement that raises the question of whether Treasury sees problems that the rest of the market is missing,” Cowen & Co. analyst Jaret Seiberg wrote in a note to clients. “Not only did he consult with the biggest banks, but he is talking to all of the financial regulators on Christmas Eve. We do not see this type of announcement as constructive.”
Presumably, Mnuchin’s statement came in the context of the U.S. government shutdown amid deadlocked budget negotiations. But his statement had echoes of the 2008 financial crisis. The all-hands-on-deck meetings suggested an element of crisis.
The Dow Jones Industrial Average plunged when the markets opened on Monday. In fact, stocks are on track to close out the year with the worst losses since 2008. The plunge is stark considering the strong rally in the first half of the year.
Oil prices fell sharply on the news, adding to a string of losses that has pushed WTI below $45 per barrel and WTI as low as $53 per barrel.
The timing of Mnuchin’s curious statement could not be worse. Fears about an economic slowdown are mounting, there is a brewing political crisis in Washington, the government shutdown has rattled the markets as well, and in the background the Federal Reserve continues to hike interest rates. In fact, President Trump reportedly explored the possibility of firing Fed chairman Jerome Powell, a move that would likely spark a market reaction that would conceivably make the recent volatility look minor by comparison. The rumor of Trump’s desire to sack Powell prompted Sec. Mnuchin to issue a statement denying the report’s veracity.
It’s a gloomy note to close out the year on, and Mnuchin only seemed to add to the impending sense of doom.
Oil markets were already suffering from the prospect of oversupply, but an economic downturn could scramble the supply/demand picture even more as we head into 2019. The working assumption was that crude demand would continue growing briskly, albeit at a slightly slower pace than 2018. Those projections, however, are completely at the mercy of the global economy.
Should things take a turn for the worse, there will be little that OPEC+ can do to right the ship. The cuts of 1.2 million barrels per day are already being dismissed as inadequate by oil traders; a deteriorating economic picture would magnify those concerns. There would then be very few sparks on the horizon that would knock crude prices off of their downward trajectory.