Markets Stabilise and volatility drops as infection curve flattensCreated: 13th Apr 2020
Suddenly the markets look a bit flatter. Smaller ranges and a bit more normal. That said, it is hardly normal in the outside (or should we say “inside”) world, with many countries in lockdown or social distancing. In this week’s Podcast Adrian and Jerry examine the current trends and news impacting the markets including USD strength, Stock markets pausing and major oil price spikes. We hope you enjoy the session.
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Shortened holiday week in the West with markets shutting on Friday in celebration of Easter.
All markets will be closed Friday with all European markets also closed next Monday.
However, the US does not have a holiday next Monday so all markets will be open but with reduced liquidity, especially in Fx.
Some light at the end of the tunnel?
Far East mkts reacting positively to news that southern European states are seeing a flattening in the curve of infections and mortality rates as the global epicentre of the coronavirus epidemic continues to fight back.
China, whether you believe the numbers or not, seems to be exiting some of the extreme measures, as production and demand start to pick back up modestly.
News that Bo Johnson was hospitalised last night knocked GBP slightly . No. 10 said that the move was precautionary and was required for some tests to find out why his infection has persisted longer than others.
Oil market volatility – Cuts to production planned but not agreed ……yet.
Oil markets remain centre stage as the world awaits a deal between Opec and Russia – referred to as Opec+. Trump had threatened sanctions on Saudi and Russian oil if the two failed to start negotiations.
Weekend news was that Saudi and Russian officials were exchanging accusations about who was responsible for the breakdown in talks in Vienna three weeks ago.
A meeting tabled today has been delayed whilst the two sides sort out their negotiating positions ahead of an emergency Opec meeting on Wednesday.
Expectations are for cuts of the order of 15 mln barrels per day to counter the collapse in oil demand and prices. This would be huge – perhaps realistically Opec will agree 10 mbd
It is unclear whether The US will be included in this – Saudi Arabia has always said that it would support a deal as long as all global producers are involved. That would surely include the US Shale oil producers.
Trump has made no such commitment to involve or persuade US shale producers to joining in the cuts.
Ironically with prices down in the low $20’s many shale oil producers are existing on a wing and a prayer as they run out of cash, so it is highly likely that US production will wane anyway.
End of Q1 – Started out with promise – despite the US / Iran spat, markets endured further positive runs with US markets hitting record highs as recently at Feb 19th.
Sine then the world has changed significantly. The coronavirus epidemic has resulted in a global slow down, with some economies coming to a stuttering halt as governments battle to prevents the disease spreading too rapidly and overwhelming health services.
Europe pretty quickly became the global epicentre for the coronavirus but the US looks to be taking over the sad mantle.
Market participants have struggled to price in the risk as whole swathes of the global economy shut down. Markets suffered precipitous falls in mid-March as investors rushed to liquidate massive positions and move into to cash. …..mostly USD cash.
As always the pendulum may have swung too far on the downside so it is likely the market has bottomed temporarily – they do tend to have a second look so it depends how governments are going to play the exit strategy.
Markets have fallen faster and further than in the Great Recession of 2008. Not since the Great depression of the 1930’s have economies been so badly affected.
US markets took just 16 days to enter a bear market – that’s a fall of 20% from a peak. That’s the fasted in recorded history. The previous record being 1929 when it 44 days.
Economists are now rushing out forecasts for the likely hit on economies. Here in the UK, economists believe the UK ill sustain a collapse in GDP of around 15% in Q2 - much worse than in the Great Financial Crisis.
In the US Goldman Sachs has predicted a 34% annualised contraction in GDP in Q2 – of course it is just one quarter so the likely hit in Q2 is 12 t0 14% call in GDP. GS is also predicting that unemployment will sky rocket to 15% by mid-year – an increase of 11%.
FTSE -95 -1.7% Dow -580 -2.7% S&P -53 -2% DAX -106 -1.1% Nikkei -1569 -8%
Shares had a quieter week as volatilities subsided – with VIX at 45 – down from the extremely elevated levels from previous 3 weeks which saw VIX peak above 85.
EURUSD -3.26 -2.9% GBPUSD -1.83 --1.5% USDJPY +0.36 +0.4%
Whilst risk correction has calmed down resulting in cooler heads for the stock market, the USD has continued to benefit from haven buying as investors prefer to park their cash in USD.
GBP volatility subsiding somewhat following roller coaster ride over the previous 2 ½ weeks.
Gold unch UK Oil +10 +40% US Oil +7 +32%
Gold closed unch on the week but did trade in an elevated range of $70.
Gold’s safe haven status being obscured by liquidity issues and the temporary closure of refining facilities in Switzerland due to virus threat.
Data / Events this week
China Bank holiday
Australia RBA policy meeting. No changes expected expect with bond buying program maybe
Opec – Opec+ meeting in Vienna
Eurozone ECB policy minutes from lat meeting
US PPI – downward pressure.
Good Friday – all markets closed
US CPI downward pressure to build.