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Collinson FX: April 27, 2020 - Markets finish on a positive note

by Collinson FX 27 Apr 2020 02:05 PDT 27 April 2020
Rawhiti - Mahurangi Regatta - Mahurangi Harbour - January 2020 © Richard Gladwell / Sail-World.com

Collinson FX: April 27, 2020 - Markets finish on a positive note

Markets closed out the week on a positive note, after a week of disruption, over the collapse in Oil prices. Oil prices turned negative in the week, for WTI May futures contract, reflecting the oversupply and full storage capacity. Oil prices have recovered back above US$17/barrel, but remain under severe pressure, as producers look to cut supply. OPEC PLUS has committed to substantial cuts and it looks as the US will join the party, in an effort to bring some semblance of normality to the markets.

The pandemic rolls on, but it appears to under control and contained. This allows certainty back in to markets and authorities can now plan the return of economic activity. This has already begun in Europe, with Germany and Austria phasing in economic activity, while many States in the US begin a return, in the coming week. The return of global economic activity is the only long term solution to oil and commodity demand. The rebound in oil and commodity prices has enabled the corresponding currencies, to regain lost ground. The AUD trades 0.6380, while the NZD regained 0.6000, as the Government moves from the extreme lock-down stage 4 to stage 3.

The coming week has an avalanche of global economic data releases, lead by GDP growth numbers and Central Bank rate decisions from the FOMC, Bank of Japan and ECB. These events have been largely ignored despite the shocking numbers, flowing into the statistics released, due to the historical nature. The events that markets have focused on are the control and containment of the virus and factors that impact that, thereby driving the re-opening of economies and the resulting damage that has been sustained.

Collinson FX: April 22, 2020 - Collapsed oil spreads

The collapse in Oil prices continued to dominate markets, as the impact flowed through into the banking sector and the wider equity markets. US equities have sustained massive losses in equities, in the first two trading days of the week, as markets consider the impact on the banks of the collapse in the Oil and Gas sector. President Trump tweeted his support for industry and instructed his Energy and Treasury secretararies to ‘formulate a plan’ to support the ‘great US energy companies’. The collapse in global demand has conspired with over production to provoke this situation and while there has been a deal with OPEC PLUS to limit supply, the only solution is to re-open global economies.

The coronavirus spread has passed it’s peak in both Europe and the US and that is why the market focus has been allowed to switched to the Oil & Gas crises. The heart of the problem remains the pandemic and Governments ability to re-open their economies. Germany and Austria are reopening their economies in Europe and the ZEW economic sentiment data showed a bounce, off from historical lows. The EUR remains steady, trading 1.0850, despite a powerful rise in the reserve, while the GBP crashed to below 1.2300.

The collapse in oil has had a domino effect on banking and the wider equity markets, which has driven risk appetite lower and flows back to the safe haven US Dollar. The collapse in oil has unsettled commodity prices and the associated currencies. The AUD fell back below 0.6300, while the NZD plunged below 0.5950, perhaps oblivious to the activities of the RBNZ. The RBNZ has expanded ‘QE’ as massive issues of Government debt is being absorbed by the Central Bank. This monetization of debt is a big red flag to most economists, but appears to be the new global norm, for most Central Banks. There is a price to be paid, in the near future, for this unorthodox monetary policy.

Oil has taken the platform from the pandemic temporarily, but the Central issue now is the impact the virus has had on global economies. When can these economies re-open and what devastation this has caused (short/medium/long term), which can only be assessed after the storm has blown over.

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