Global equity markets have opened positively this morning after yesterday’s sell-off, which saw the FTSE-100 fall nearly 200 points, or 3.34% and the S&P 500 fall 2.20%, as poor US company earnings and economic data releases offset some of the recent optimism from the slowing spread of the coronavirus, which would allow the lockdowns to be lifted.
Goldman Sachs, Citigroup and Bank of America yesterday joined JPMorgan and Wells Fargo in setting aside billions of dollars for potential bad-debts.
Although US retail sales fell by a record 8.7%, it shouldn’t have been a surprise: buying a car or a new outfit was probably a secondary consideration given the lockdowns and rising unemployment.
Additionally, the Fed Beige Book stated the obvious, saying “economic activity contracted sharply and abruptly in recent weeks”.
As this doesn’t constitute new news, we won’t comment further except to repeat that because equity markets like predictability, not uncertainty, they are currently trading on every news headline – and as such we expect equity market volatility to remain elevated.
Furthermore, as we have previously stated, while we are clearly heading towards a global recession, it will be a unique recession as the coronavirus outbreak is a transient issue that is being countered by unprecedented and coordinated government and central bank policy responses.
Elsewhere, despite the OPEC/Russian (coined OPEC+) 9.7m barrel oil production cut we have previously highlighted (please see here), US West Texas Intermediate (WTI) and Brent crude, the international benchmark, continue to fall, with the price of WTI now below $20 per barrel and Brent below $28 per barrel. As an aside, given the fact that BP and Royal Dutch Shell account for nearly 12% of the FTSE-100, this was the main reason for the UK index underperformance relative to the rest of the world.
Despite the fall in the oil price, as we highlighted last week (please see here), the collapse in oil prices may have more to run.
While it was an historic output cut and it did officially end Saudi Arabia’s price war, it is likely to prove futile as it is unlikely to put a floor under the oil price, given it fell well short of bringing any sort of balance to the market following the dramatic fall in demand caused by the coronavirus lockdowns – and as we commented on 6 March 2020 (please see here) a repeat of the 1980s when the price of oil collapsed to $10 is now a possibility as supply is still greater than demand and more importantly, the world is literally running out of space to store all this oil!
The question is: is cheaper oil a good thing? I’m sure no one will complain about the lower petrol pump prices when we fill our tanks up – but more importantly, as we have previously stated, oil accounts for a large proportion of the total cost to produce all sorts of everyday products from plastics, household products and clothes, not to mention the energy to produce food (fuel, electricity, fertiliser and pesticides) and metals (energy accounts for a large percentage of a mine’s operating cost and, for example, the production of aluminium).
However, on the flip-side, a large proportion of the bad-debt provisions we have seen from the US banks this week are related to oil and gas company defaults as US shale-oil producers have been hit hard by the oil price collapse. Additionally, as shale producers have cut back on drilling and fracking new wells, thousands of direct and indirect jobs have been (and continue to be) lost – which is contributing to the record US jobless data.
Although these job losses will be painful, it is believed that only around 200,000 people work in the shale industry – and given, as we have previously stated, we believe US unemployment could easily rise to 15 to 20% (please see here), this isn’t our biggest worry.
Consequently, we believe it is good news as this low price will help to subsidise and spur economic growth just as the global economy needs it most – and it more than offsets the concerns about US shale-oil job losses. Additionally, the coronavirus outbreak has clearly damaged OPEC’s ability to manage oil and may further erode the cartel’s long-term future.
Investment Management Team