Mid-Week Drivers: COVID-19, Oil Prices and Russia and Boris JohnsonRiskier assets find support early in the week, but downside risks remain as the spread of the coronavirus continues and central banks signal more easing.
During the weekend we had news from oil producers. Meanwhile, the coronavirus continues to plague the world, as even the Prime Minister of the United Kingdom has been infected. In addition, March economic data has revealed the ongoing economic turmoil.
Dukascopy: Let us start our discussion with the crude oil market. We heard that there was some sort of disagreement present over the weekend between Russia and Saudi Arabia. Moreover, OPEC+ did not hold a meeting on Monday.
What is going on and how is it impacting oil prices?
We saw OPEC and Russia delay the Monday meeting until Thursday. That sent the markets into a tizzy early in the week.
Expectations are for some form of an agreement, however, with both sides agreeing to meet. Both would have likely delayed further had there been little to put on the table on Thursday.
In reality, however, the U.S, Canada and the rest will also need to cut production. If the U.S, in particular, fails to also agree to any cuts then both Russia and OPEC may fail to adhere to any agreements made this week…
Dukascopy: I agree, it is well known that a majority of oil producers need oil to remain above 40 Dollars per barrel to remain in business. At the top of this is the Russian Federal budget that is planned with 42 USD in mind, and oil sales make up nearly 60% of government income.
In the meantime, we still have the coronavirus outbreak going on. It has been dictating most of the equity market moves. Moreover, as countries react to it with stimulus, we are seeing moves on the currency exchange rate charts.
We are seeing governments and central banks committed to offset the impact of the virus on the respective economies.
The governments, central banks, and even the markets will need to let the dust settle, however.
We saw the number of new cases slow on Monday and then rise again on Tuesday, which caught the markets off guard. Hopes had been for a downward trend to continue through the week.
Tuesday’s COVID-19 numbers were a reminder that we are not out of the woods just yet.
From a stimulus perspective, it’s not in place to support an economic rebound once the virus has been contained and lockdown measures eased.
Central banks and governments will need to deliver more down the road. For the likes of FED, what ammo they have left will be one question that the markets will have to ask.
On Wednesday morning we heard the RBNZ talk of a willingness to ramp up its purchasing program. There was even the talk of negative rates down the road…. This weighed on the Kiwi Dollar mid-week.
So, we are seeing plenty of volatility across the FX and equity markets. With plenty of uncertainty over what lies ahead, this is unlikely to abate anytime soon.
Dukascopy: So the selling and the virus spread have calmed down for the time being. It might give the governments some time to prepare for battling the virus not only from a medical but also from an economical perspective.
The spread of the virus has certainly eased. We are not seeing numbers similar to those last week. But, France saw a spike on Saturday and another on Tuesday. Italy also saw another rise after having reported its lowest number of new cases since Mid-March on Tuesday.
Governments, in particular, will need to do much more to ensure that we don’t see the spread of the virus accelerate again.
These containment measures really need to remain through April into early May. The economic fallout is going to be significant with an extended lockdown, but the fallout would be far worse should the spread of the virus continue into May at the current rate.
Meanwhile, there was news recently that the Prime Minister of the United Kingdom Boris Johnson has gotten infected by the coronavirus.
Dukascopy: We can agree upon wishing the PM a hasty recovery from the illness.
For sure that we wish Boris Johnson a speedy recovery. There had been some mixed messages earlier in the week. Initially, Downing Street reported that the PM was not on a ventilator. Updates then revealed that Johnson was receiving oxygen in ICU.
The markets are going to need some clarity on that. Boris Johnson is Pound positive, while the markets consider Foreign Secretary Raab a hard Brexiteer. Raab is also generally less supportive of fiscal policy support.
He may have to change his stance near-term, however, as a result of the unprecedented impact of COVID-19.
Either way, the markets will want some clarity on the PM’s health and we can expect the Pound to remain reactive to the news wires.
Dukascopy: Let’s move to our usual main topic – macroeconomic data releases. It is expected that the data sets most likely will be used mainly as a measure of the ongoing turmoil. Using historical data and market impact reaction analysis has become useless in the current unprecedented environment.
On the economic data front, we’re now passing February numbers and seeing May and April figures.
These figures will give a picture of the economic fallout from the Coronavirus.
We are unlikely to get an indication of what effect stimulus has had until we start seeing May – June figures.
When considering the fact that the U.S only began shutting down in late March, early May, we may even need to wait until June to at least assess the effects of the FED’s moves.
This is all before even considering the impact of the Stimulus Bill that has yet to fully pass through the economy.
When considering the time frames, this does leave the markets at risk of another tumble.
Let’s face it, there’s no spending, as such, to support the U.S economy. April Manufacturing and Service sector PMIs in the U.S may actually look more similar to the Eurozone’s March figures. Stimulus effects are unlikely to be evident, which certainly supports the view that there is more choppiness to come…
Dukascopy: Good to know that the data will be helpful in measuring and managing the impact of the coronavirus.