Afternoon all.
What a week we have brewing by the looks of things today.
Looking at the weekend futures on IG, markets look like they could open about 2% down on Friday’s close and that is really nothing considering that there was a late day rally off the lows which added more than 2%.
So the open could put things back at the lows from Friday, but for US markets, that still keeps the main indexes above the lows from the previous Friday, the 28th February, when there was a proper panic sell-off.
So while the ‘on the ground’ situation for Europe and the US has definitely deteriorated since the 28th February, have markets already discounted this worsening situation and able to hold these levels?
Some analysts definitely think a retest of the lows is necessary, and I’d take that further and say clear new lows need to be probed to reflect the potential dangers ahead.
I wrote about Italy this morning and I don’t think disruption on this scale is properly priced into markets yet, allowing for the the very real possibility that some other areas of Europe may need to follow suit at some point.
I’ve also just seen this headline from the US:
- Washington state is considering mandatory containment measures.
One thing I’ve noticed from all the talk about this outbreak in the states is that they ready to take legal action if their freedoms are impinged. Talk of mandatory measures being placed on inhabitants is likely to stir quite a heated debate in the media and could undermine efforts to contain this virus.
Another big story that is of substantial economic importance to the global economy is that Saudi Arabia are going to boost Oil output next month following the failed negotiations with OPEC+. This move has always been on the cards by Saudi and I think it would have come much sooner, but they were busy trying to protect the Oil price over the last couple of years because of the Aramco IPO they wanted to do.
This is being seen as Saudi Arabia going to war with Russia because they failed to agree to extended cuts, but this was always about the US shale producers, who have destroyed OPEC’s ability to control prices in the last few years.
Even though COVID-19 is the big news, this Oil story could really spiral into something very messy for economic stability. The potential demand side shock from the virus situation could temper what the Saudi’s are willing to do, but equally they might decide now is the time to put the hammer down and inflict damage.
Just take a look at US Oil company stocks and they are down massively. Add to that a stressed corporate credit environment caused by bond yields collapsing and it’s a recipe for company failures if Oil prices continue to drop into the $30’s and maybe even take a look at the $20’s.
Also remember there was bad economic data from China yesterday, so that’s Europe, USA, Middle-East and China all with some kind of economic stressor events on the go and it’s hard to see where the markets can turn for a relief rally.
If markets don’t do down and test/break those Feb 28th lows I think it would be quite the miracle, but miracles do happen, and maybe the promise of further stimulus from Central Banks and Governments can keep a floor under them. Who knows.
All these things coming together this week could create the ‘peak fear’ sentiment I’m trying to spot, but it could also be too early for that. I have some shorts that can help dampen the drawdown these markets falls are creating, but my main focus will be on when and where I want to start deploying the spare capital I’ve built up.
Thanks for your time.
$SPX500 $GER30 $NSDQ100 $DJ30 $OIL
