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The Coronavirus Continues To Impact The Financial Markets. Crude Oil And Equity Markets

Bob Mason

The coronavirus continues to impact the financial markets. What data do we have about the pandemic?

We’ve seen the epicenter gradually migrate from East to West, with the U.S becoming the epicenter in recent days.

The total number of cases in the U.S has surged to 187,347. When considering the most affected member states of the EU, however, the total number of cases continues to surpass the U.S. Just factoring in the number of cases in Italy, Spain, Germany, and France, the total number of cases stand at 325,651.

It is grim reading as the global number rapidly approaches 1,000,000.

Demographics have certainly played a part in the mortality rates seen across the different geographies. Continental Europe has suffered the most, with mortality rates sitting as high as 10% in Spain and Italy.

In Germany, the mortality rate sits at just 1%, which is quite a variance.

Across in the U.S, projections are for the mortality rate to accelerate beyond the current 3%. In fact, projections are quite alarming. When considering the Federal and State power structure, however, the spread of the virus was always predicted to be more severe than in China… For the EU, the reintroduction of borders was particularly important, even though it should have occurred sooner.

For now, as the numbers continue to rise, the bigger question will be the relevance of the numbers circulated.

Limited testing kits could see hospitals run out, leading to a marked fall in actual tests. This could ultimately skew the daily updates on the number of new cases.

A more meaningful approach would be for both new cases and total daily tests to be circulated. This would give a better lay of the land for the markets, the WHO and local authorities in each country.

Such transparency, however, is a big ask as governments look to calm citizens and avoid an even bigger market rout…

It appears that the two major economies are handling the virus differently. What about the global equity markets?

The global equity markets appear to have yielded to the fact that the global shutdown will continue until late April.

Of greater concern, however, is that the markets are anticipating a sharp rebound in economic activity at the bell…

In reality, however, an extended shutdown to the end of April would need to lead to an end to the spread of the virus. We would also need to see borders reopen and for supply chains to be rebuilt and quickly.

It is somewhat hard to imagine that all of this is feasible in days or even weeks. Protectionism alone suggests that governments will maintain border controls for far longer. There will be doubts over the numbers being released across many jurisdictions that will make governments all the more cautious…

Quarterly earnings have been written off and companies are being pushed into taken on additional debt burden. Airlines, in particular, are facing a dark future. Assuming a June quarter-end rebound is therefore likely over-optimistic. As we saw in China’s Manufacturing PMI, while production was on the rise in March, global demand continued to slump. That is not a positive, PMI at above 50 or not…

When we throw in the lasting impact of the U.S – China trade war, the volatility is unlikely to abate any time soon. Until we stop seeing marquee stocks swinging by 10-20% in a day, we’re unlikely to have seen an end to the downside.

So there is still data that market participants could watch. Meanwhile, how is Italy handling the situation? It was all over the news throughout the past couple of weeks.

Italy remains in lockdown and the government announced its extension until Easter.

In reality, however, daily infection rates remain high, raising questions over the current strategy.

We have seen self-isolation imposed on those with symptoms and those tested positive but not in need of medical care. Unfortunately, the self-isolation has driven the spread of the virus. The elderly are taking care of the elderly, who have also taken care of the young and vice-versa. It’s for this reason that the numbers in Italy are horrific and Spain is no different.

There should be a slowdown in the spread, however, assuming citizens abide by the self-isolation rules. But to expect the spread to materially slow by Easter is optimistic.

If we continue to see the daily cases rise by 4-6k levels then the shutdown should extend for the 2nd month. That would be more aligned with China, which successfully curtailed the spread to acceptable rates. Even then, Beijing still had to shut down as imported cases began to rise.

Reopening borders would certainly be a big mistake. Tourism and manufacturing may account for a 3rd of GDP, but moving too early could be even more devastating…

In the meantime, the crude oil price benchmarks are also on the headlines. What is the situation?

That was some slide in crude oil prices. Hitting the lowest level in 18 years, sentiment towards supply and demand seems more reflective of the current economic environment.

Governments and companies appear to be eager to get things going but it’s unlikely to happen overnight

The Saudis are ramping up production at a time when the EU and the U.S, in particular, are in shutdown mode.

We have also heard of Trump calling on Russia to discuss restoring price stability. It seems highly questionable, however, that Trump and the U.S would form an oil alliance with Russia. Trump may look to pressure Russia into cutting output, however. The last thing Trump needs is for the administration to have to start bailing out U.S shale producers. At $20 per barrel, it may be hard to avoid…

Looking ahead, OPEC will need to announce a sizeable cut in production. This is also unlikely, however, when considering production costs. For the Saudis alone, production costs sit at sub-$10 per barrel. There’s a long way to go before they need to pull back from flooding the market…

This article was originally posted on FX Empire