"Mama told me there'd be days like this…" -- Some thoughts on the morning after…

ref: - General

Why the title? Just too many gnarled old traders being quoted on the wires probably, telling us how they've seen it all before but that this is all new to the latest generation, as though the "newcomers" had just been staring in disbelief at their screens, wide-eyed and helpless as the world took a lurch lower in a manner beyond their experience… and understanding. More then a little condescending, we reckon… not to mention inaccurate. Mind you, you can't help thinking about a new type of highly-geared investor, using cheap debt to follow trading strategies formulated by the longest market expansion in history. Yes, there's some real pain out there and now would probably not be the tactful time to talk about market complacency, but no one should be surprised any more about how extreme panic-driven moves can be.

Anyway, some respite this morning, mostly sparked by President Trump floating the idea of a payroll tax cut and promising other supportive measures that we may hear about as soon as today. If the President has been seen as slow to react to the Coronavirus threat, plummeting share prices in an election year have concentrated the mind wonderfully. Investors are expecting other governments and central banks to step up to the plate too, though as we've said many times the latter mostly have very little room to play within terms of rate cuts and may have to focus more on expanding asset purchases etc. It would seem inconceivable in these circumstances that governments would baulk at measures to help companies and individuals to overcome the difficulties brought on by the Coronavirus effect, especially things like cash flow issues. We do note however that while Germany would no doubt embrace virus-specific action, its central bankers remain opposed to further monetary easing while fiscal stimulus, turning on the spending taps and even running a deficit or two, is still politically risky… even now. We shall see…

Where to start even a token round-up? Safe-haven government bonds, the target for such a desperate scramble that staggeringly the 10yr US Treasury yield got below 0.32 % at one stage, is probably the best example of the calmer feel today -- even if it doesn't last long. That US 10yr yield is above 0.71% this morning. And talking of safe-havens, the Jap Yen and Swiss Franc have given up some of their recent gains this morning whilst the dollar, which remember was something of a safe haven itself before it was undermined by expectations of rate cuts that no other major central bank had room for, is about 1% stronger across the board. ***

*** NOTE: Last week in an emergency measure the Fed cut their target band for Fed Funds by 50bp to 1.00 -- 1.25 %. At the Fed's scheduled meeting on March 18th, the probability that the Fed will slash again all the way to 0.25 -- 0.50 is now calculated at nearly 70% according to "Countdown to FOMC", but some big hitters are calling a move to 0.00 - 0.25%. It's what the President has always wanted, and has played a big part in the weaker dollar that he has also been calling for. It's just a shame that it's the prospect of an out-of-control virus that the administration has been slow to tackle and a subsequent economic slowdown and lower stock markets that has brought it about.

And so, to oil, a double-whammy within a double-whammy if you like. If yesterday's stock market meltdown was a result of both the escalating Coronavirus threat and a stunning collapse in oil prices, then that collapse in energy markets was itself a function of an overwhelming, and very unusual, two-pronged attack. As everybody knows, the price of a commodity is ultimately decided by the balance between supply and demand. Faced with the inevitable prospect of a virus-led slowdown meaning lower demand for oil, what did OPEC + decide to do? Flood the market with supply, of course!

Naturally, it wasn't quite as simple as that. Saudi Arabia was suggesting further stringent cuts in production levels but Russia refused, saying it wanted to wait to assess the extent of the Coronavirus effect. The meeting broke up with feelings running high, and the Saudis immediately not only opened up the taps but also offered large price discounts to their oil-buying customers. Predictably, the Russians are responding in kind.

Despite previous price agreements between these two former "partners", theirs has always been a pretty spikey relationship. Russia claims that it can handle an oil price of $40 -$45 for about 10 years if necessary, whilst most agree that Saudi needs a price of about $80 to meet their need to square their budget. Advantage Russia? Maybe, though the Saudis do have plenty of forex reserves if required and being the largest exporter of oil, they have ammunition of a different nature too. This will come down to a mad rush for market share, which doesn't bode well for the chances of a recovery in prices.

Beyond the mutual antagonism between these two, there are other major considerations at play here. In 2014 Saudi Arabia let open the floodgates in a quest for market share and in particular to knock the growing influence of US shale oil producers out of the game. They were ultimately unsuccessful and the dramatic fall in prices was a self-inflicted wound. But if the current collapse in prices was to end in at least a partial demise of the shale industry -- much of which can't survive with oil at current price levels -- they probably would be pretty happy, even if in deference to their relationship with the US they'd keep quiet about it.

The Russians would have no such reticence… perhaps the main reason why they refused a new production cut agreement was that supported prices have mostly benefitted the US shale oil industry. Russia would delight in blowing a hole in President Trump's claim of a new "oil independence", and the imposition of US sanctions against the trading arm of Rosneft for alleged infractions in Venezuela has only sharpened their desire.

Mr Trump won't care too much about Russian grandstanding… but he might if pressure on the heavily-indebted shale drilling industry results in job losses, corporate bond defaults and downward pressure on stocks. In an election year, that would be "sub-optimal"…

Last prices: West Texas Intermediate $33.55, up 7.77%

Brent $37.11, up 8.00%

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