🌎 Oil Wars | LATAM on their knees | Global leaders go viral | 3 Things
March 13th, 2020
Wow - It’s only been a week since our last newsletter, but it feels like a lifetime ago. This week has been choc-full of market shaking events and panic is rising.
For those of you who have international exposure and are worried about your FX risk check out our 1-day risk management strategy. It’s a perfect read for while you are holed up in your containment bunker.
Did You Know...
The Big news Tom Hanks and his wife contracted the COVID19 virus whilst shooting a movie down under. They have been Castaway and confined to their hotel room. Time for some Tom H trivia. What are his top 5 grossing movies of all time? (Answers below)
Oil prices plunged on Monday to $34 a barrel, a drop of 24%, the largest drop in nearly 30 years. Despite a small bump today, oil prices have suffered their worst week since 2008.
How did we get here?
6th March - at a meeting with the Organisation of the Petroleum Exporting Countries (OPEC) in Vienna - The OPEC and OPEC+ members were asked to reduce production, Russia refused.
8th March - Saudi Arabia responded with discounts to buyers and promising to pump more crude, between $6 and $8 per barrel - the announcement caused a free-fall in oil prices.
9th March - stocks worldwide reported major losses attributed to a combination of the price war and Coronavirus.
10th March - Saudi Arabia announced an increase in production by more than 25% and Russia increase by 300,000 barrels per day.
Most energy analysts have dismissed the idea that Saudi Arabia and Russia’s price war has been specifically designed to target U.S. shale, however, it doesn't look good for U.S. producers.
Despite starting an oil war, Putin seems to remain popular amongst the Kremlin, with the government looking to change the law to allow him to run as president again.
The RUB had been trundling along before the oil dispute and coronavirus set it back 20% in a week or two. The economy was already at risk from a contraction in the mining sector. Even before the oil crisis, the unemployment rate hit a 9 month high, and the PMI fell to a 7 month low. Look for RUB to move lower before it goes stronger.
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LATAM is getting hammered from all sides
You can’t help feel sorry for the Emerging Markets in times like this. The weight of the Oil Wars and global slowdown caused by the coronavirus has caused investors to unwind their carry trades, and as a result, the LATAM region has been pummelled.
This coupled with what has been a fragile recovery at best, even the more established economies such as Brazil and Mexico across the region have been crushed.
Mexico is the world's 12th largest exporter, focused mainly on vehicles and machinery - the same amount of goods as the rest of LATAM combined, and almost 40% larger than the other NAFTA partner, Canada. It’s the world’s 8th largest producer of oil. As the world economy slows, and oil prices plummet, Mexico is in for a rough patch.
Brazilian President Jair Bolsonaro's press secretary Fabio Wagjngarten reportedly tested positive for the Covid19. Trump actually hosted them and a number of others for dinner on Saturday in Florida. The irony is on Tuesday Bolsonaro downplayed the effects of the virus “During the past year, obviously, we have had moments of crisis. A lot of that is fantasy. And coronavirus, which is not [what] all the mainstream media makes it out to be,” he said.
LATAM, in general, is not well-equipped to grow out of its pain. Not one LATAM country features in the top 50 of the World Bank’s “Ease of Doing Business List” (yes it’s a real list). The two largest countries - Brazil and Argentina - place 124th and 126th respectively. Not only that, but no LATAM country has ever been in the “top 10 improvers” in years.
MXN is at its worst level ever vs the USD (even in 2009 it only got to 15). and Peru and Bolivia are caught in the regional crossfire. BRL has dropped 20% in a year. Despite a moment of stability after an IMF safety line, ARS has been on a Venezuelan scale depreciation streak and COP still remains one of the most volatile currency pairs in the world.
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Global leaders show their mettle... or lack of!
So here we are, the COVID-19 outbreak has officially been termed a pandemic by the World Health Organisation. Leaders around the world are going to be under increased scrutiny as nations look to be guided.
The reactions have been mixed and although many have called for a globally unified response to COVID-19, we have seen anything but.
ECB President Lagarde and President Trump tried to calm the markets but this didn’t have the desired effect. Unlike Draghi’s famous “whatever it takes” speech, Lagarde said it wasn't the job of the central bank to close bond spreads. The ECB package was underwhelming and disappointed investors. Trump’s “disaffected bystander” oval office speech was equally ineffective, as USDCHF dropped below .9350 and stock futures tumbled. Boris Johnson, looked to impose a softer approach than many other countries by leaving schools and universities open.
So how have countries reacted?
U.S. - Trump imposed a 30-day ban on travel from Europe. The FED cut rates earlier in the week by 50 bps
GB - BOE cut interest rates by 50 bps and announced a solid 100Bn stimulus package.
EU - Europe is seeing an uncoordinated response as borders have been shut to non-nationals
The Bank of Japan had nowhere to go - its rates have been at -0.1% since 2016. It will likely boost purchases of ETFs beyond the planned 6Tr JPY/yr at its March 18-19 meeting.
Australia's central bank pumped A$8.8B into the system through repurchase agreements to boost liquidity
The Reserve Bank of India instituted USD buy/swap agreements to provide liquidity in the FX market
Iceland - Cut interest rates to 2.25% matt- who cares, pop there is 350,000...
World Bank announced $12B in assistance
GBPUSD is the most volatile of all major currency pairs, perhaps due to the alternating headwinds and tailwinds of trade negotiations and elections. Before the viral outbreak, the UK was expected to have modest growth of only 1% in 2020. Even that seems unlikely now.
AUD has dropped from 0.81 to 0.67 (nearly 19%) in just over 2 years. From what we can see it’s mainly over a shortage of toilet paper and the fact that everyone there runs straight back into the JPY in times of uncertainty.
JPY has strengthened against everyone including the USD (7% in a month) as investors unwind their positions and pay back their Yen denominated obligations.
EUR has been on a rollercoaster ride after an initial sell-off last week (a low of 1.0790 against the USD) EUR rebounded this week peaking at 1.1450 before Lagarde’s negatively viewed comments pushed it back down towards 1.11.
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In Other News
This Weeks Economic Data Calendar
Keep An Eye On Next Week
The 1 day FX Risk Management Strategy
Hindsight is 20/20 - ironically 2020 is set to be the most volatile year since 2008. Markets are red across the board and the world is on lockdown. DON'T PANIC - in times of uncertainty, it is important to remember that you can only control what you can control... READ MORE
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Currency Heat Map
This chart shows the relative volatility between currencies. The redder the color, the higher the volatility.
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Quiz of the week
Toy Story 3 ($1.067b)
Toy Story 4 ($1.061b)
The Da Vinci Code ($758m)
Forrest Gump ($677m)
Toy Story 2 ($497m)