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09.03.20

Market Update

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As if the coronavirus crisis wasn’t enough of a challenge for the financial markets. The decision by Saudi Arabia to cut oil prices and threaten to expand production adds another deflationary force in the global economy. Brent oil prices have fallen close to $14 to $31 in early trading in Asia. It marks the most significant fall in oil prices since 1991.

Last week’s OPEC+ meeting ended in disarray. The oil price fell 10% on the day, with Russia baulking at an OPEC call for 1.5m b/d of production cuts. The current OPEC+ agreement to restrain production ends at the end of March after which Saudi is threatening to expand production. The real concern is not so much the oil price fall of itself, rather it is the possibility that energy companies might default on some of their borrowings if they cannot sell their oil / oil-based products at decent prices. This scenario could lead to a wave of bond market defaults and therefore the market reaction was so severe this morning.

Saudi is seeing a potentially huge drop in demand, which it cannot afford given the cost of the war in Yemen and overall defence of the kingdom. The response has been in simple terms, to try to put Russia out of business.

The Saudi issue is the accelerant on a fire that was already burning well enough of its own accord. The coronavirus has plenty of its own fuel and it is here we get into the importance of an investment process that has both tactical and strategic disciplines.

We expect some decisive actions from central banks, or at least announcements in this direction. Such actions are unlikely to amount to another round of monetary QE from the Fed, but rather a swapping of government bonds already on its balance sheets with direct purchases of corporate bonds, given that the big falls in government yields from the increased demand in bonds allows them to take supportive action without pushing up yield levels. The Fed has the means to put out this specific fear driven ’fire’, while the economic stimulus effect from the lower cost of energy and of capital should prove to be a very welcome relief over the coming months for the virus disrupted global economy.

As we previously mentioned, as a longer-term investor, it is important to try and look past short-term market noise, no matter how loud, and consider the longer-term trends and impact.

We will continue to keep you informed of market movements, however should you have any questions regarding the above, please do not hesitate to contact us. If you have a question please contact me or a member of our team at hello@jarrovian.co.uk

Chris Salacinski
Director & Financial Planner

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