• Matthew Fotheringham

🌎 How much more can oil take? | Trump vs Powell | Japan pump trillions | 3 Things

June 12th, 2020

Happy Friday!

So... International markets took the biggest hit March this week but it's not all bad news… New Zealand has said that it has eradicated the Coronavirus! There is hope after all.

Did You Know...

New Zealand has a history of being first. They technically have an unfair advantage as they are the first country to welcome in the new day. Which one of these following statements is false?

  1. New Zealand was the first country to allow all women to vote in parliamentary elections.

  2. The first person to split the atom was a New Zealander.

  3. The first commercial bungee jump was in New Zealand.

  4. New Zealand created the first Nuclear Power Station.

  5. A New Zealander was the first person to climb Mt Everest.

(Answers below)

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Powell: "We Are Not Even Thinking About Thinking...

...about raising rates”. The FED made it abundantly clear that they will not be raising rates any time soon (certainly not before 2022) and that although they were prepared to continue to prop up the markets with more cash it may not be enough.

Lower rates mean cheaper lending and the markets liked this initially, who wouldn't? However, this was short-lived, as the chairman went on to cast a considerable COVID sized shadow over the US economic recovery.

Trump immediately took to his Twitter account lambasting the FED saying that they “are wrong so often” and that he sees growth in the Q3, more growth in Q4 and “one of the best years ever in 2021”. We may need to fact check this one.

Trump’s comments did little to slow the market sell off, as traders seized on Powell’s cautionary tale. Powell said “that many millions will not get their old jobs back” with unemployment affecting women and minorities the most. He expects the jobless rate (currently at 13.4%) to remain as high as 9.3% by year end and likely to still be above 5.5% going into 2023. He followed this with a 6.5% in GDP and reiterated his stance that the recovery will be “significantly” tied to the virus.

Many people have been concerned about a potential “second spike” as lockdown measures are relaxed and as Black Lives Matter protests gain more followers. We crossed the 2 million cases mark here in the US which makes up nearly 30% of known cases globally. It is this stat that may mean we need to put global optimism on hold for now.

The Dollar index had been falling steadily since the beginning of May but has spiked upwards with all the unhappy news this week

Nasdaq and S&P both dropped over 5% today and the Dow closed 6.9% down (-1,861.82 points) the largest drop since March. As we know USD strengthens on global gloom and doom and we saw a 1% jump on the DXY as the greenback gained back some of its recent losses against its counterparts except the JPY (more on that later).

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Oil Futures Plummet Again

The rough ride for oil in 2020 isn't over yet. West Texas Instruments futures fall more than 3% to $35.87/bbl, the most since April’s negative numbers. Oil faces a trifecta of doom.

Oil inventories are still at record levels, over 538M bbls - the highest ever. That glut is compounded by another 180 M bbl stored at sea in crude carriers. FED chair Powell said Wednesday that COVID still poses severe risks to the economy, which will keep demand depressed.

Rob Haworth of US Bank Wealth Mgmt said “Demand isn't coming back fast enough, and supply is coming down more slowly. “

Two of the biggest oil producers are Canada and Russia. Canada’s production breaks even at $55/bbl. Russia is in a little better shape, breaking even at $40/bbl. Neither is making any money right now.

Both currencies are well off their lows against the USD. The RUB has been quite volatile, with nearly 14%/annum volatility. Hedging costs are enormous, at over 4%/yr, favoring selling USD.

The Loonie is not nearly as volatile at 7%/annum, with hedging costs near zero.


Japan Pumps More Into The Market

At its recent meeting, the Bank of Japan again dramatically loosened its monetary policy amid a rapidly deteriorating economy. But how far can the BoJ really go?

Industrial output is at historic lows, and just recently the Core CPI fell for the first time in 4 years. The BoJ announced it was bolstering its loan support program, which helps banks lend to businesses, particularly SMEs, at low-interest rates.

This program now amounts to JPY 75 trillion (around USD 700 billion), which is up from JPY 45 trillion previously. The BoJ confirmed that it would continue to avoid setting an upper limit on the amount of Japanese government bonds (JGB) it would purchase in order to cap the 10-year JGB yield at around 0%. Kinda funny to see zero considered a “cap”.

Further, the BoJ was the biggest taker in cross ccy swaps provided by the FED - out of $447B, the BoJ took $222B, showing some concerns over the dollar supply.

JPY has been trading within a narrow band for several years, remaining above 104 but below 114, showing modest volatility of 7%/annum. Hedge costs are well under 1%, favoring selling USD.

In Other News

Currency Heat Map

This chart shows the relative volatility between currencies. The redder the color, the higher the volatility.

Deaglo Currency Heat Map

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Quiz of the week

4 is False. There are also no nuclear power stations in New Zealand!

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