Crude's collapse is sending shockwaves across global markets

Investors have gone from contemplating the prospect of oil to US $ 100 to sub-US $ 50 in less than two months. No wonder global markets are playing catch-up.

From stocks and bonds to currencies, assets worldwide are gripped by a crude awakening. Monday saw oil's largest one-day drop in three years, securing its longest losing streak on record.

Early trading jitters on Wednesday suggested the sell-off may not be over, though West Texas Intermediate later climbed up after OPEC President Suhail Al Mazrouei said the group and its allies would be what is needed to balance the market.

Here's a look at the cross-asset fallout:

Stock Stress

The Stoxx Europe 600 Index dropped on Wednesday, with oil and gas companies among the big losers. There could be more bread in store. The performance of energy shares relates to the broader index has yet to hit the year-to-date lows despite elevated price swings in the oil-market complex.

In the U.S., energy stocks were the biggest drag on the S & P 500 Index on Tuesday's benchmark gauge. The jump in volatility of the oil price will feed into already bruised U.S. stocks, according to Macro Risk Advisors.

About US $ 80 million flowed out of the SPDR S & P Oil and Gas Exploration and Production exchange-traded fund, ticker XOP, on Tuesday. That was the third day of withdrawals and the largest in two weeks.

Short interest in XOP is at its highest in a year, with nearly a quarter of shares outstanding slow out. The ETF tracks an equal weighted basketball of U.S. oil and gas firms.

Credit Pain

The corporate bond market had taken a closer look at it.

U.S. investment-grade debt is already facing the worst year since 2008, and energy securities make up some 15 percent of the BBB rated universe.

The energy sector also accounts for 15 per cent of the entire U.S. high-yield bond index – which gears posted the biggest drop in six weeks on Tuesday. Yields on sub-investment grade debt in the sector has been high since the start of October.

However, as Ye Xie of Bloomberg 's Markets Live blog notes, a regression of oil prices and the high – yield credit spread since 2010 shows that WTI between US $ 50 and US $ 70 looks like a sweet spot for junk bonds. The spread tends to widen below US $ 45, his analysis shows.

Meanwhile, inflation in Germany and the U.S., close to notching 2018 lows. Any slowdown in price growth could mean less hawkish outlook for monetary policy.

Emerging Impact

Declining oil is a two-sided coin for the collection of assets and economies classed as emerging markets. Many of the countries, such as Gulf of Saudi Arabia, are energy exporters that suffer when prices decline. Others, like Turkey and India, have to import fuel and benefit from cheaper energy.

After a few months, India's rupee rallied to the highest in almost two months on Wednesday. Forwards for the Saudi riyal jumped for a second time in a month, which is indicated in the currency exchange rate.

Still, the link between oil and currencies is far from straightforward, with Russia's ruble defying the latest downdraft. In fact, the historic relationship between the two countries has been breaking new ground.

The impact for other emerging assets may be higher with the signals. If price declines are driven by shifts in demand, it suggests slowdown – bad news for developing nations. If the slide is based on increasing supply, the consequences for EM are less clear-cut.

Unfortunately for investors, it's a bit of both. No wonder the correlation between the prices and the MSCI Emerging Market Index of stocks varies wildly.

Bloomberg.com