Oil prices have cratered and that should be good news for net importer Asia, right? Not really, if one were to look at the weak growth data and outlook for the global economy with a strong rally in bonds pointing towards a recession.
“These movements reflect genuine global recession fears and in such a scenario, bonds are the only asset class which win. There is no meaningful differentiation between the various risk assets and therefore it is a cross asset story at this point with no obvious winners,” said Homin Lee, regional economist at Lombard Odier.
Financial markets have sold across the board on Monday after an OPEC and Russia oil price war which started over the weekend after Saudi Arabia aggressively cut the relative price at which it sells its crude by the most in at least 20 years. This was in retaliation to Russia’s refusal to cut production as it felt that propping up prices would be a gift to the US shale industry.
“It comes as the world scrambles to deal with the market mayhem and economic fallout caused by the relentless global spread of coronavirus,” said Nigel Green, chief executive of deVere Group, an independent financial advisory.
“With the combination of the implications of the oil stand-off and the outbreak, I now believe that it’s almost inevitable that there will be a global recession this year.”
Reflecting these fears, US Treasuries rallied hard, extending their gains from last week, with the 30-year yields at 0.714% and the 10-year yield at 0.3469%, both record lows. Fed futures were pricing in a cut as large as 75 basis points at next week’s Fed meeting and now are factoring in a 50 basis points cut. The US central bank could take rates close to zero by its April meeting, traders expect.
Stock markets fell across Asia with the Nikkei 225 index plunging 5.1% and Australia’s S&P ASX 200 benchmark crashing 7.3%. The MASCI Asia-Pacific ex-Japan index dropped 4.3%, while Hong Kong’s Hang Seng index fell 4.5% and China’s CSI300 shed 3.4%.
Credit markets were rocked too with the Asia IG index widening out 36 basis points to 107/112 and China’s credit default swaps 24 basis points wider at 72/79 bps.
Wall Street is expected to open on a gloomy note with the S&P Futures limit down at 5%. Bhanu Baweja, a UBS strategist, said “credit induced hit to forward multiples could take S&P 500 towards 2650-2700,” implying a fall of more than 10%.
And yet while it means lower petrol pump prices, there is little reason for optimism.
“Our perspective on the movement of oil prices is that the backdrop matters. Given the containment measures and curtailment of travel, the coronavirus was already weighing on the outlook for oil demand,” said Morgan Stanley analysts in a report.
It said that while lower oil prices will translate to lower retail prices, this positive benefit will not be fully realized as the lower oil burden on consumers will likely not fully translate into higher spending in the near term as it is occurring against a backdrop of an overall downdraft in the economy and financial market volatility.
Asia should have been rejoicing at the collapse in the price of the oil benchmark Brent – China, India, South Korea and Japan are all huge net oil importers. After it collapsed by a third on Monday to US$31.02, more downside has been forecast, with Goldman Sachs cutting 2Q and 3Q20 forecasts to $30/bbl with “possible dips in prices to operational stress levels and well-head cash costs near $20/bbl.”
But there is no joy in this turn of events, at least for the moment.
“If six months later, there is visibility of the virus spread and the Saudis ramp up production, Asia can start looking at this as a way to boost real income and support to their economies. That conversation is for later and for the moment there is massive repricing of the macroeconomic outcome and the policy trajectory,” said Lombard Odier’s Lee.