Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Chief Investment Officer
Summary: In breaking news this morning, the Eurogroup finance ministers have declared they were unable to come to agreement on a coronavirus response, clearly a development that will spook markets and the euro this morning. This on top of an unconvincing follow-up rally in the US yesterday could have risk appetite on edge today.
Note that this will be our last Quick Take publication until next Tuesday, April 14 due to the Easter holiday.
What is our trading focus?
What is going on?
The Eurogroup meeting was a bust as no agreement on the virus response has yet been agreed. This is spooking markets in early trading in Europe this morning. Practically, it may not mean much as the ECB maintains firepower and an keep EU sovereign bond markets orderly, but it is a worrisome political signal that must be addressed – whether by this meeting (set to continue) or very soon.
S&P Ratings downgrades Australia’s sovereign debt outlook from stable to negative – this is the first bond ratings agency to do so on Australia’s AAA rating. S&P said that the fiscal and economic risks are tilted toward the downside and that “ we could lower our rating within the next two years if the Covid19 outbreak causes economic damage that is more severe or prolonged than what we currently expect.”
China’s Wuhan province, the ground zero of the Covid19 outbreak, has been reopened for travel, a further sign of normalization in China.
UK Prime Minister Boris Johnson remains in ICU – but no update on his condition, as the last available information is that he is receiving oxygen but not on a respirator.
US pushes back on OPEC request to join oil output cuts – but US shale production will likely fall rapidly anyway, as it is easier production to shut in and as individual well decline curves are very steep and a slowdown in new drilling will mean few new wells coming online.
What we are watching next?
Follow up political signals from EU after today’s Eurogroup meeting failure – extremely important in the medium run or markets will have to begin pricing a growing EU existential crisis. The only hopeful angle is that the meeting is set to continue tomorrow, according to Eurogroup president Centeno.
Equity markets after yesterday’s weak close – as we note above, the technical status of the rally after yesterday’s nominally bearish “shooting star” candlestick on the main averages raises the stakes further on the bull/bear status of this market – especially with long holiday weekend coming up for the US and Europe.
Oil prices – again, particularly with the recent rally, we see significant risk that any deal agreed on Thursday will prove too small to measure up to the magnitude of the demand collapse, leading to fresh pressure on the front months of the oil price curve to new lows below 20 dollars per barrel.
The unfolding shape of the Covid19 crisis and perhaps more importantly, the shape of the recovery. If the recent rally is based on hopes that we are seeing the light at the end of the Covid19 tunnel, we are concerned that some of the celebration is premature – the first nations to begin rolling out normalization-from-shutdown measures are moving with baby steps and in stepwise fashion that could take months to accomplish.
Economic Calendar (times GMT)
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