The US stock indices kicked off the week with a bang, with three major indices rallying more than 7% at Monday’s session as news that the new coronavirus cases in some of the world’s hotspots such as New York, Spain, Italy and France are plateauing. This does not mean that the confinement measures will be withdrawn soon, but it allows investors to see the light at the end of the tunnel. The strict measures to contain the virus contagion could however be extended until June or even July, meaning that Europe’s southern countries who rely on tourism for living could bypass the summer of 2020, while their government debt have been exploding to fight the virus’ strong negative impact on their economies.
In the UK, things are about to get more serious with Boris Johnson being moved to the intensive care after having contracted the coronavirus. Not only that the number of cases are expected to surge in the UK for the next two weeks, but the forced change in the head office of the government may also shake things, with Dominic Raab who had been defeated in last year’s Conservative elections finding a sweet spot to prove his leadership to the country during a time of severe health crisis and economic distress. At this point, the UK’s constitution doesn’t require an election, but of course, depending on the circumstances, the political pressure could lead to a new election in the UK. But that is a low probability scenario for now. In the coming weeks, Raab must make life-or-death decisions for the UK, including the duration of the lockdown, investment in medical equipment, government aid for those who have lost their revenues, and/or their jobs and so on.
Johnson’s aggravated health didn’t have a meaningful impact on the pound, meaning that his absence hasn’t led to a leadership crisis in Britain. This is positive news. But if the situation gets more serious, the pound could be shaken on both directions. Johnson’s potentially prolonged absence will certainly delay the Brexit talks, leading an extended period of uncertainty for the UK, but the extension will also gain time for the UK to start healing the coronavirus-led economic slowdown before it starts dealing with a EU-divorce-induced economic shock. In the low probability scenario of a durable leadership change, a softer Brexiteer leadership could also give a positive spin to the sterling, devastated by the worries of a too quick and a too disorderly divorce from the EU.
Looking at the equity space, the FTSE closed Monday’s session 3% higher, slightly less than its European peers, as energy stocks lagged on falling oil prices and retailers dived. Sainsbury’s lost 3.42% as the deteriorating coronavirus crisis in the UK means that the leading British retailers will need to step up their efforts to shift their business online and hire thousands of people to deliver orders to homes. Though, the retailer business is one that doesn’t need to put a lock on the door.
Energy stocks on the other hand have been feeling the pinch of a downside correction in oil prices after the meeting between Saudi Arabia and Russia was rescheduled to Thursday. The expectation of a 10 to 15 million barrel per day cut is now mostly priced in near the $30 level. Therefore, the price retreats could give interesting dip buying opportunities to oil traders in the run up to the OPEC+ meeting. But if the two countries don’t surprise the market with a larger production curb, the price of WTI could settle near or below the $30 pb handle until the demand in oil starts picking up. And that could not be any time before the first week of June and last week of July.
In the currency markets, the AUDUSD traded past the 0.6150 as the Reserve Bank of Australia (RBA) maintained its interest rates unchanged at the historical low of 0.25% at today’s monetary policy meeting.
The EURUSD fluctuated within a 30-pip range around the 1.08 level. The German factory orders fell less than expected in February, while the industrial production during the same month should a 0.9% decline. In Italy, February retail sales data should give an early indication on how bad the consumer activity may have been impacted by the coronavirus outbreak. A consensus of analyst expectations points at a 0.4% decline, which could be easily beaten to the downside.
Elsewhere, the Asian shares mostly gained except shares in Sydney which have been pulled lower by energy and mining stocks.
Gold rallied past the $1670 an ounce as the precious metal gained parallel to risk assets yesterday. Decent offers should cap the upside potential approaching the $1700-resistance.
Activity on FTSE futures (+0.13%) hint at a slightly positive start, but the energy-heavy index could feel the pressure of a downside correction in oil prices amid growing uncertainties regarding Saudi and Russia’s ability to agree on a sizeable cut in their production.