Global equity markets managed to post their first positive week since mid-February last week, despite sharp falls on the Friday, after EU leaders failed to come up with any sort of coherent response to the virus currently spreading across Europe.
The main discussion appears to be around some form of mutual bond or debt called a Coronabond with Italy and Spain in favour, with the Netherlands, Austria and Germany opposed. In the absence of any sort of consensus most countries are adopting their own tailor-made packages to address the crisis as infection and death rates continue to rise, with Spain and Italy the hardest hit.
Crude oil prices have continued to sink to new 17 year lows, with storage capacity continuing to fill up, as global demand collapses.
Pictures of grounded aircraft fleets sitting parked on runways across the US point to a global economy that has ground to a virtual standstill with US crude at one point dropping below $20. In some cases, producers in the US are paying to have oil taken off their hands, they can’t give it away. In an age of negative interest rates, we’re closer than ever to getting negative oil prices.
Even if the Russians and Saudis were able to come to some agreement to cut production, the current surplus in supply, and lack of demand is unlikely to prompt much of an uplift in prices.
One silver lining for the Saudi’s will be the pressure this collapse in prices is having on US shale producers, some of which will probably go bust.
Asia markets underwent a rather mixed session with the Nikkei sliding sharply lower, however South Korean and Australian markets rallied strongly with the ASX200 posting its best over one day gain as the Australian government unveiled a A$130bn stimulus package.
European markets have also started the new week very much on the back foot, sliding into negative territory soon after the open, as it becomes increasingly apparent that the lockdowns currently in place across Europe will need to be extended well into the summer months, further impacting business activity.
We might start to see some month and quarter end portfolio readjustment as we come the end of what has been an awful Q1 for equity markets, though we might find some of that downside limited by some portfolio readjustments, in a month which has seen some of the biggest monthly declines in years.
In company news EasyJet announced this morning they were grounding their entire fleet of aircraft until further notice. The company said that its employees would be put on 80% pay under the recently announced government plan, while looking to increasing its cash flow. In separate news its being reported that EasyJet founder Stelios has said he will take steps to remove the entire board if it doesn’t cancel a £4.5bn order for 107 planes from Airbus, saying it threatens the existence of the airline given the current levels of uncertainty. Given the current plight facing the airline industry that doesn’t seem an unreasonable request given reports that EasyJet might have to look at a taxpayer funded bailout.
Airbus shares have also come under pressure on these reports, sliding over 5% in early trade, over concerns that the business could well see wholesale cancellations as airlines look to conserve capital.
Medical services group Smith and Nephew announced this morning it was withdrawing its full year guidance until the outlook becomes clearer regarding the current virus situation. The company says it expects underlying revenue growth in Q1 to fall 8%, while saying that it expected Q2 revenue and H1 trading margin to be substantially lower as well.
Pennon Group, owners of South West Water, and waste operator Viridor, announced their full year numbers were in line with expectations. The sale of Viridor to Planets UK Bidco Limited, on the 18th March, for £4.2 billion, is expected to complete in Summer 2020.
On the outlook management have said the company has £1.6bn in cash, and liquidity, as well as access to £245m of funding through the Sustainable Financing Framework.
Rolls Royce shares have slid sharply, after weekend reports that it is facing a cash flow crisis. The collapse in air travel has seen up to half of its revenue stream disappear, and while it has managed to draw down an extra £2.5bn to boost short term liquidity it could come under scrutiny if the crisis drags on. Meggitt, another key player in the global aviation sector, is also sharply lower.
Last week Dutch lender ABN Amro announced that it had taken a loss of $200m on a single client’s margin call, raising significant questions about the banks risk management processes. In further developments this morning the bank, which is majority owned by the Dutch government, announced that it expected to make a loss in Q1, and will not be paying a dividend either, on the recommendation of the ECB.
ING has also said it would be not be paying a dividend, also at the ECB’s recommendation, in a sign that European bank balance sheets are already feeling the strain of the economic impact of the current outbreak. As a result banks across the region are sliding back sharply, with some big falls in Italian banks as well as banks in France, Germany and the UK.
The US dollar had a rotten week last week, its losses accelerating in the wake of last Thursday’s blow out record shattering 3.3m jobless claims number, a number that this week could well come in higher and be reflected in this Friday’s upcoming March payrolls report.
This US dollar weakness has seen a respite at the start of this week, though this could change as investors price in the prospect that last weeks $2trn stimulus package could well be a starting point for further measures, if this week’s US data proves as bad as some investors fear it could be.
The pound is slightly lower after last week’s downgrade of the UK’s credit rating by Fitch to AA- with a negative outlook, citing the potential near term damage caused by the coronavirus outbreak and the fiscal loosening that would be required to combat the effects. In a statement of the obvious the agency cited the prospect of a big jump in government spending; however, the UK is unlikely to be unique in that respect. Governments across the world are already opening the spending taps to deal with the crisis, and unlike Europe the UK has a central bank that can act as a lender of last resort, without preconditions, which rather makes last week’s action rather meaningless.
Twelve years ago, the actions of ratings agency might have made a difference, now they generally garner a collective shrug of the shoulders.
As cases of coronavirus continue to rise in the US, markets there look set to open lower after their big falls on Friday, ahead of what is set to be another big data week for the US economy.