Hopes For Easing Containment Measures Tempered by Deep Recession Fears

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Data Sourced from FE Analytics, and Bloomberg Finance LP

HOPES FOR EASING CONTAINMENT MEASURES TEMPERED BY DEEP RECESSION FEARS

This week as attention turned to talk of exit strategies and several European countries announced plans to loosen restrictions, there is hope that the social impact of the virus may be peaking. The economic impact, however, is likely just beginning. As economic data begins to trickle in we’re seeing unprecedented falls in business activity and jumps in unemployment. While we’ve been impressed with many of the policy responses offering unprecedented levels of support to workers and businesses, the deeper the recession becomes the harder it will be to bounce back.

Elsewhere oil prices, the most unnecessary sub-plot in this story, continued their wild ride. As economic activity grinds to a halt the world continues to pump far more oil than is needed. With nowhere left to store the excess, prices briefly turned negative, before recovering. Unfortunately, that recovery has been partly driven by threatening talk between America and Iran, a reminder that after the coronavirus there is a whole other source of global instability ready to go.

OIL: NEGATIVE PRICES ANOTHER WARNING OF EXTREME SUPPLY IMBALANCE

The oil price went negative for the first time ever this week as low demand and an extreme shortage of storage capacity combined to see the price of the US benchmark rate, West Texas Intermediate, shoot straight past $0 to end Monday at -$37 a barrel.

Don’t expect free petrol at the pumps any time soon. The headline figure was quite specific. It applied to one month forward contracts for delivery in May and trading was very light – with few buyers. Brent Crude, the usual international benchmark price, also fell but remained around $20 a barrel, while the WTI spot price and longer-dated future contracts also remained positive. However, such is the shortage of storage in the US this dip into negative oil price is expected to occur again next month. And while this fall into negative pricing was very short-lived and quite technical it does illustrate the powerful forces affecting the oil markets, as oversupply and a sharp fall in demand mean oil prices are likely to remain very low in the short-term.

GLOBAL: BUSINESS OUTPUT FALLS AT FASTER RATE THAN LAST RECESSION

The sudden stock market sell-off in February and March was based on the fear of how much damage the shutdown would do to economies and individual companies. This week has seen more concrete evidence of the scale of the problem, with

business and consumer confidence at or near record lows. IHS Markit Purchasing Managers’ Indices for the US, EU and UK all show business output fell at a far faster rate and to lower levels than anything seen during the financial crisis. In the UK, the services sector has been particularly badly hit with many consumer-facing businesses closing entirely leading to a forecast of a drop in quarterly GDP of at least 7 per cent.

In the UK, March retail sales fell more than 5 per cent, the biggest drop since records began. With employment increasing and many workers on furlough, consumers are also being much more careful with their spending as consumer confidence falls to levels not seen since the financial crisis.

BONDS: ECB HINTS AT INCLUDING HIGH YIELD IN BOND BUYING SCHEME

The European Central Bank has expanded the terms of its bank liquidity scheme by allowing high yield bonds to be used for collateral for the first time. The ECB held an emergency meeting this week to relax the requirement that bonds used as collateral need to be investment grade.

The temporary measure is set to expire in September and covers ‘fallen angels’ or former investment grade bonds which have recently been downgraded. The relaxation is just for corporate bonds. The ECB has already granted a separate exemption for Greek sovereign debt.

The ECB has stopped short of the measures taken by the US Federal Reserve which last week extended its programme of corporate bond purchases to include fallen angels. With the ECB pledging “if and when necessary, to take additional measures to further mitigate the impact of ratings downgrades”, there is speculation that it may soon follow the Fed and

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