• Matthew Fotheringham

🌎 Trillion Dollar Bailouts|How will India cope with COVID-19|Oil, how low can you go?|3 Things


March 27th, 2020


Happy Friday!


Another week in quarantine passes! For those who have just been put on lockdown, welcome to the party - you can now take part in challenges such as push-ups, toilet roll keepie-uppies and shaving your head.


Videoing yourself doing anything and then sticking challenge at the end of it, will take you viral.


One silver lining of this lockdown is seeing which of your colleagues takes working from home seriously and who turns up to conference calls in the unicorn onesie. Please remember, as we usher in a new era of video conferencing, the camera is always rolling… poor Jennifer.


Did you know?


Now we all have more time to focus on our fitness, did you know that banging your head against a wall for one hour burns 150 calories… won’t be catching us doing circuits with this gem of a life hack.


Can you name the 5 exercises that burn the most calories? (Answers below)



USD


The Senate emergency relief package (McConnell doesn't like calling it a bailout.)



The US Senate unanimously passed its version of the $2Tr stimulus bill (Pelosi promises quick passage in the House Friday). President Trump is expected to sign it “assuming there are no grandstanders“.


This is the third bill to address coronavirus issues. The largest intervention in history, it dwarfs the 2008 TARP at only $700B and coupled with the FED intervention it brings it to a whopping $6 trillion.


Being that large means there’s something for everybody.

  • $500B lending program through the Treasury, including $25B grants to airlines

  • Direct payment to individuals

  • Unemployment benefits boosted, and $450M for the Emergency Food Assistance Program

  • $349 billion to small businesses, payroll, utilities and rent won’t need to be repaid

  • $45 billion for FEMA Disaster Relief Fund

  • $117B for hospitals and a $100B public health and social emergency fund

  • And many other items. Read the bill here


You may ask how this will be paid for, as it amounts to about 10% of the entire outstanding national debt ($23Tr). The key is the FED, which has the best magic trick in the books - turning debt into cash. The FED (any Central Bank can do this trick) purchases government debt (Treasuries) and replaces it with credit. It doesn't even have to print money to do so; it simply issues a credit to its member banks that held the Treasuries, and puts them on its own balance sheet. The credit is treated just like money by the member banks. This process is called “open market operations”, and is the same process by which the FED raises and lowers interest rates.


Ordinarily, a government issuing so much new debt would negatively impact its currency, but not when you’re the US. The dollar Index stands at a multi-year high. However it has lost some of its gains after unemployment claims soared by 3.3m this week. Both EUR and GBP gained above their psychological levels of 1.10 and 1.20 respectively.


US Dollar Index

USD RUB NOK MXN


A barrel of oil costs less than a sandwich



Everyone is familiar with the recent crash in oil prices, which are due to multiple factors; the main ones being a major drop in demand (airlines and shipping are way off), and the Saudi-Russia falling out in OPEC over production levels. These two factors have driven the two indices (Brent and West Texas Intermediate) down about 60% this year.


But that's only part of the story. As anyone trading in commodity futures knows, there is a disconnect between the futures prices and the physical market. In the physical oil market, prices are being discounted even more, with some crude streams trading at as little as $8/bbl!


Needless to say, oil-dependent economies like Russia and Nigeria are suffering mightily. With Brent trading at $27/bbl and the discount needed to match Saudi crude to Europe at $15 to $17/bbl, Russian oil producers have to sell crude at close to breakeven rates. Russia’s revenues will be $40B lower, driving Russia’s budget into deficit.


Nigeria’s oil and gas sector represents about 65% of government revenues and will suffer. Mexico is the 7th largest oil producer, and oil generates over 10% of Mexico’s export earnings.


The outlier is Norway, which is doing fine, as only 5% of employment is associated with the sector. Also, Norway’s famous safety net, combined with very strong banks and credit ensure Norway will weather the storm.


Like most currencies this week the MXN NOK, NGN and RUB were able to claw back some of their losses against the USD. However, they are still trading at all-time lows for the most part. MXN crossed the 25 levels and NGN is showing +22% in yearly vol. We watch with bated breath as to how these oil-dependent emerging countries cope with Covid-19. Some are certainly better equipped than others. We expect a strong correlation to COVID infections and deaths to currency weakness.



INR


India and other EM nations woefully underprepared for what's about to come...



The Covid pandemic is worldwide, affecting both wealthy countries as well as developing/EM countries. While the richer countries have the capacity to respond with stimulus money and public health programs, developing countries are at a large disadvantage. The combination of an economic and health crisis will stress these countries to the breaking point and beyond.


Nowhere will this hit harder than India. 20% of India’s 1.3 billion people are poor (270M). Only 21% of the poor have access to latrines (let alone toilet paper) and a staggeringly low 6% have access to tap water. Obviously these conditions, coupled with the fact that they live in such close proximity to one another, exacerbates the spread of the virus. Even the wealthier employed in the Indian tech sector will be impacted. February already registered a 19 month low for investments. One fast-rising segment, logistics services, has seen a 25% drop due to reduced global shipping. This will only fall further in the coming months.


Despite the “quarantine cop” videos that have been circulating recently showing some aggressive measures they are taking to keep citizens in isolation. A recent article in the NY Times stated that they expect 300m-500m people to be affected with Covid-19 by July.


Our thoughts go out to everyone in these countries, fingers crossed it’s not as bad as we fear.


Over the last two years, the INR is one of the worst-performing currencies against the runaway USD. Despite showing GDP growth of between 6%-10% over the past year, the Rupee is sitting at record lows. This trend looks set to continue as EM’s look set to be off-limits for tourism, importers and investors.



In Other News



This Weeks Economic Data Calendar



Keep An Eye On Next Week



Feature Article


What has COVID-19 really done to the world?




Covid-19 has shown an even uglier side to its weaknesses. The virus-driven lower demand has impacted this global network and is mirrored in many indicators... READ MORE


Visit our Intelligence Center


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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


  1. Jump rope/skipping - 667-990 Calories/hour

  2. Running up Hills/stair sprints - 639-946 calories per hour

  3. Kickboxing = 582-864 calories/hour

  4. Cycling intervals - 56-841 calories/hour

  5. Running - 566-839 calories/hour (10 min/mile)

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