Welcome back to another Monday of Market mayhem. And, are you ready for this? A swarm of locusts is ravaging plantations in Africa and parts of Asia. Forecasters warn that the locust invasion will endanger the lives of millions of people. At the same time, COVID-19 is spreading around the world, killing thousands. In the past thirty days, we have seen stocks tank, wiping away trillions of dollars of value. We have seen large industries like restaurants, cruise lines, and airlines decimates. And, we have seen thousands of people lose their jobs.

At TIOmarkets we believe that clear, factual analysis will help our traders navigate these troubled times. So, let’s kick off the week with a look at the key focus areas for traders.

About Those Jobs

The situation may worsen. Analysts at Goldman Sachs expect the number of people applying for jobless claims in the US to reach a record 2.5 million. Treasury secretary, Steven Mnuchin has warned that the unemployment rate could reach an unprecedented level of more than 20%. At the same time, analysts believe that the US economy could drop by more than 24% in the second quarter.

What About Central Bank?

While global central banks have intervened, their impact is not being felt. Indeed, the Dow Jones Industrial Average (DJIA) dropped by more than 900 points when the Fed made a surprise one percent rate cut. The Fed has brought rates to zero, launched a $700 billion bond purchases program, and launched additional incentives. The ECB, too, launched a €750 billion quantitative easing program and initiated other programs to incentivize banks to lend. Other central banks like the BOE, RBA, RBNZ, and BOJ also intervened.

What Are Governments Doing?

Governments have not been left behind. In the United States, congress is negotiating a $2 trillion dollar rescue package while in the UK, the government will pay 80% of wages to workers who have been laid off. Germany, the fiscal conservative country, is raising €350 billion to offer stimulus to companies and individuals. In total, European countries have planned a fiscal stimulus package worth more than €1 trillion.

What About Gold & Oil?

In the meantime, traditional investment arguments have been deconstructed. In the past, it was said that gold was the safe-haven commodity to own in a time of crisis. However, gold has not lived up to its name. Instead of soaring, the price of gold has declined by more than 8% while the CBOE volatility index has risen by more than 345% in the past 30 days. One positive thing is that the price of gold has done better than overall stocks because the S&P500 and Dow have dropped by more than 30% in the past 30 days.

Why has gold declined at a time when it should have risen? There are several reasons. First, gold has an inverse relationship with the US dollar, which has gained by more than 2.40% in the past 30 days. Second, demand for physical gold from central banks, individuals, and institutional investors has waned during this time of crisis. Third, the drop of stocks after a ten-year rally has led to margin calls. As such, investors who believe that stocks will recover have moved from gold to prevent margin calls. The chart below shows the inverse relationship between gold and the USD in action.

Crude oil too has been caught at the intersection of geopolitics and Coronavirus issues. In the past 30 days, the price of West Texas Intermediate (WTI) and Brent has declined by more than 55%. The reason is two-fold. First, Saudi Arabia and Russia have disagreed on the best way to save oil prices. In their meeting early this month, Saudi proposed supply cuts of more than 1.5 million barrels a day. Russia rejected this and Saudi opened its taps. The country is now pumping more than 12 million barrels every day. Second, this oversupply is happening at a time when demand for oil is expected to decline for the first time since 2008/9. A combination of oversupply and low demand will always lead to lower prices.

Geopolitical issues are at play. Russia and Saudi Arabia have the lowest oil production costs in the world. This means that they can withstand ultralow oil prices for a longer period. Their aim is to put significant damage to American shale producers, who are highly in debt. The two countries expect these companies to start filing for bankruptcy. This is already happening.

There is a silver lining in all this. First, according to the Wall Street Journal (WSJ), American producers have started talking to the Saudis. This could lead to a deal to limit production. Second, Trump has said that he is open to talking to the Saudis. Here, the US, which protects Saudi has a leverage to force them to stabilize prices. The chart below shows the 30-day price action of Brent and WTI prices.

Let’s Talk About the Yen

The Japanese yen too is often viewed as a safe haven because of the large foreign holdings Japan has. For example, Japan is the second-biggest holder of US debt after China. In the past 30 days, the Japanese yen has been mixed. The currency started by gaining as investors rushed to the safety it offered. This did not last long, and the currency has weakened significantly against the USD.

Part of the reason is that investors are worried about the health of the Japanese economy, which was weakening before the Covid-19 crisis. According to analysts, the economy was set to head to recession even before the disease. Indeed, the Japanese economy declined by a whopping 6.3% in the fourth quarter. The weakness came at a time when the BOJ had little firepower after it brought interest rates to below zero in 2016. Another reason for its decline against the USD is that most investors have rushed to the stability and safety offered by the US dollar. The chart below shows the divergence between the US dollar index and the Japanese yen index.

Save Us Bitcoin?

Bitcoin, the so-called digital gold has not offered a lot of happiness either. In the past 30 days, BTC dropped by as much as 50% to below $4,000. As with gold, Bitcoin’s decline has been partly because holders sold off assets believing fiat currencies will be better options if cities are shut down. In addition, investors have been forced to liquidate their BTC holdings to fill margin calls. Finally, there is little demand from institutional investors, most of whom have seen a substantial amount of money evaporate. Still, BTC has made some recovery after gaining by almost 50% in the past few days. In the next few months, we could see its price rise as enthusiasts wait for halving, which will happen between May and June. The chart below shows the price of BTC in a time when volatility in the market has increased.

What Next?

In the coming weeks, the financial markets will continue to be volatile. Signs that governments are containing the disease will be positive for crude oil, gold, stocks, and even Bitcoin. What are you trading right now? Join the conversation and tweet us @TIOmarkets and let us know.

TIO Staff
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