Collinson FX: March 11, 2020 – Oil price triggers market crash

Market volatility continues, driven by uncertainty and the coronavirus infecting people and psychologies. Global equities rebounded strongly after the apocalypse of Mondays trade.

The ‘Oil Bomb’ exploded in markets and in combination with the coronavirus, was able to cause pandemonium. Global equities collapsed, as did the Dollar, commodity prices and bond yields. Oil prices lost 25%, after the Saudi’s decided to ramp up production and cease support for pricing, declaring war on Russian refusal to cut production. The timing was opportune and severely damages shale oil and other marginal oil producers, also hitting energy companies with unsustainable balance sheets. Oil stabilised in overnight trade, rebounding up to 10%, but the underlying circumstances remain.

The US Dollar collapsed in Mondays trade, as 10 year Bond Yields plunged to record lows below 0.4%, contradicting their longstanding safe haven title. The Yen had rallied to 102.00, confirming it’s safe haven status, but surprisingly the EUR had continued to attract support? European markets had remained remarkably resilient to the crises and the markets reaction, but that ended overnight. Italy is the centre of the coronavirus and the Government has shut down the whole country, including schools, sports events and banning travel. They have even placed a curfew on bars! The crises is now impacting European markets. European equities rebounded strongly, but all gains were wiped out by the close of trade and the EUR finally fell back to 1.1285.

The Dollar rebounded strongly, supported by a spike in Bond Yields, as Government works to contain panic and introduce fiscal support. Central banks are being exposed by extended period of failed monetary policies globally, as record low interest rates and huge QE, have removed monetary tools to combat a real crises. Central banks are now working with treasuries to coordinate fiscal and monetary stimulus. Europe, UK , Australia, NZ and the US are looking for fiscal support for damaged economies. Much of the problem has been national government’s propensity to run huge deficits and debts, supported by record low interest rates and expansive monetary policies. Corrupted Keynesian economic theory was not meant to extend over more than a decade?

The US economy was one of the few global markets able to withstand a ‘black swan event’ and stabilised interest rates should lead to flows back in to the US Dollar, as the most significant traditional safe haven. The Yen fell back to 105.15, while the EUR retreated below 1.1300. Trade exposed commodity currencies returned their surprising gains, as the reserve regained mojo, with the AUD collapsing to 0.6485 and the NZD plunging to 0.6250.

It is very dangerous to pick a bottom in the middle of a storm, but the US situation is a calming influence, which will lead markets out of the turmoil and devastation.

Collinson FX: March 10, 2020 – Oil price triggers market crash

Markets crashed overnight, triggered by a collapse in Oil prices and an explosion of coronavirus cases, halting US share market trade briefly in early trade. The news over the weekend was that Italy was taking emergency action and shutting down much of Northern Italy due to the explosion in ‘coronavirus’ infections. European markets shutting down will kill economic activity and this was not assisted by the disintegration of oil prices and bond yields. Saudi Arabia has reversed previous attempts to support oil prices, in an apparent attack on Russia and ‘OPEC +’, vowing to increase production and cut prices. This released panic across global markets, as energy prices collapsed and the associated companies share prices went into freefall. Oil fell up to 30%, while US Bond Yields collapsed, hitting banking stocks hard.

This market meltdown continues and actually has gained momentum. The freefall in Bond yields drove the US Dollar lower and the safe haven of the Yen was a major beneficiary. The Yen rallied to 102.00, while the EUR jumped to 1.1450, a surprising recipient of flows. Central banks have been operating in this world of extreme QE and record low interest rates, with the question being ‘how could Central Banks react to another major market shock’, given the high debt and weak monetary positions? The ECB and Bank of Japan are already operating negative interest rates and it looks like other Central banks will soon follow. Then what?

The collapse in oil prices has hit the energy sector hard, including oil producers and the companies that produce and supply oil. On the flip side, most countries are net importers of oil and thus should offer sharp improvement in terms-of-trade and a massive stimulus for the motorist! The consumer will benefit from the cash injection, aided also by record low interest rates, allowing massive cash stimulus.

The shut down of the industrial Northern Italy is a shock to European markets, as the impact of the coronavirus spreads, hitting the existing supply chain. This does not assist the trade exposed commodity currencies, but the collapse in US Bond yields and the US Dollar, has allowed the currencies to regain ground (despite a ‘flash-crash in early currency trade). The AUD regained 0.6600, while the NZD rallied strongly to 0.6350. This relative strength is a reflection of market volatility and the impact on the reserve currency, rather than any positive reason for a rally. It is hard to see the NZD and AUD as safe haven in a world of turmoil. They remain extremely vulnerable.

The Oil Price bomb, combined with fears over the impact of the coronavirus, are wreaking havoc on markets. The huge falls in stocks and asset prices are a shock but the sun rises every morning.

Collinson FX: March 6, 2020 – Volatility continues

Markets continued the extremely volatile trading it has been experiencing for the last two weeks, due to the coronavirus crises. The fears over the actual spread of the virus and the impact on global economies are at the bottom of these severe fluctuations. Safe haven flows continue, with the Yen charging to 106.40, while US 10 year bonds fell below record lows of 0.9%! Gold has surged and demand for commodities, lead by Oil, continues to suffer. The rise in the spread of the virus continues, although the genesis nation China, seems to be slowing.

The impact on global markets continues and economic data is beginning to reflect the impact. Travel restrictions and quarantines are smashing demand and economic activity. The huge record gains in US equities, following the Fed rate cuts and the ‘Super Tuesday’ US Primary election results, all but evaporated. Chinese economic data has been devastated, although US data remains relative strong, as the effects have not flowed through, to date. The Challenger Jobs report was strong and Factory Orders and Durable Goods Orders remain resilient, despite slipping into negatives. The Dollar remained under pressure, with the EUR breaking above 1.1200, while the GBP rallied to 1.2940.

The trade exposed commodity currencies have been beneficiaries of the sliding reserve, although the AUD drifted back below 0.6600. The Australian Government has promised fiscal support for ailing business, but the flagging commodity prices and damage to the supply chain, will impact the economy, while the NZD fell below 0.6300.

Coronavirus and the impact on global markets and the economies remain the only game in town.

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by Collinson FX