Volatility continued last week. At initial glance, you would think COVID-19, but OPEC and their not so friendly friends had something to do with it too…
Emergency Fed Rate Cut
On Tuesday morning the Federal Reserve Bank (FRB) announced an emergency .50% rate cut. This was intended to support economic activity through the uncertainty brought by COVID-19. No, a rate cut does not cure the virus! The hope is that as the virus is contained low real interest rates will help the recovery move more quickly. Markets were unimpressed, as selling ensued shortly thereafter. It was viewed as either too little of a move, or too much. Too much would leave them little in the way of policy tools to respond should things worsen.
Bank of Japan Response
The Bank of Japan (BoJ) has initially responded with open market activity, adding 500B ¥ to the market on March 2. Despite the BoJ’s efforts, equities in Japan slid at the end of the week. Japan’s trade relationships in Asia amid COVID-19 make the fall in Japan understandable.
Post-Brexit Negotiations
Brexit may have happened in January, however, that was just the beginning! Last week saw the start of negotiations around trade between the UK and EU. Most notably, the tone coming out of the meetings was one of division. It sounds like parties are far from a resolution. Prime Minister, Boris Johnson, has vowed to end talks if they have not made substantial progress by June.
COVID-19 Update
At the end of last week, COVID-19 had been confirmed in 79 countries. While the total of people who have contracted the virus is rising, the impact to the US has not peaked. Uncertainty has dominated the markets and their reactions. On the bright side, the number of new cases in China, the epicenter of the virus, has plummeted. They are hoping to reach zero new cases by the end of the month. While the death rate remains around 3%, the percentage of patient releases in China is now over 50% of cases.
OPEC and Friends
Much attention has been paid to COVID-19 and rightfully so. The economic impact of China shutting things down to slow the spread is now being felt in real numbers. Manufacturing PMI fell to 35.7 in February, the lowest level on record. This fall in production means that oil demand has slumped in recent months. OPEC and Friends (mainly Russia) met last week to discuss decreasing output to support oil prices. Talks fell apart as did any cuts, current and proposed. It is now feared that production could ramp up, causing oil prices to plunge further. This would be bad news for US shale production, which requires a higher oil price for them to reach breakeven.
Conclusion
COVID, while concerning, is more of an unknown with what its overall impact will be. Whenever there is a shock to the system, other cracks make themselves apparent. They also can often surpass the risks of the initial concern. Oil relations may be one of those cracks.
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