20 April - updates from our investment partners

  • 20th April 2020

The positive gains as markets look forward to the exit from lockdown have occurred despite a few issues bubbling away.

What has happened

European and US markets rallied for their second consecutive week last week. This may not sound momentous, but it is the first time we’ve seen this since mid-February. The positive gains as markets look forward to the exit from lockdown have occurred despite a few issues bubbling away. These are mainly the challenges of coronavirus’s impact on Eurozone unity and the continual weakness in the oil price.

Oil: weak at the front

Oil returned to its lows with WTI oil touching almost $15 when markets reopened after the weekend. Even though OPEC+ has cut supply by 10 million barrels per day there is still an estimated 15 million barrels per day of oversupply given the huge fall in demand caused by coronavirus induced lockdowns. One point to note here however is that most oil is not transacted at this so called ‘spot’ price as oil is bulky so expensive to store. As a result, most producers and consumers enter into contracts to buy oil at a specified point in the future for a certain amount. The price of these ‘futures’ have been far more resilient suggesting the near-term weakness is partially technical, caused by expectations that the Cushing storage hub may be close to full capacity, and that demand is expected to increase in time.

The Italian question

Despite risk assets rallying strongly over the last three weeks the same cannot be said of Italian debt which has seen yields rise as fears over the economy increased. The main source of this concern is the likelihood that Italy will reject the use of the ESM facility which exists to help during crises. The controversial aspect of this is the conditionality of the lending both in terms of what it can be spent on now and the programme’s possible usage to curtail budget deficits. There is increasing political pressure that the hardest hit areas of Europe, such as Italy, are not seen as unaided by the wider bloc. This was articulated by Ursula von der Leyen and Macron last week amongst other prominent politicians that err on the side of greater co-ordinated fiscal stimulus.

What does Brooks Macdonald think

The key date for Italian stress this will be Thursday where an EU summit is expected to debate joint issuance to provide union wide stimulus. After the unproductive Eurogroup meeting a few weeks ago, investors are rightfully cautious particularly as S&P are considering whether to downgrade Italy with a decision due on Friday. Meanwhile the ECB is continuing its post GFC role in trying to provide stimulus, using its powers in lieu of fiscal support which requires greater coordination. On this, the FT is reporting that the ECB may create a bad bank where the non-performing loans of peripheral banks could be moved into a Europe wide liability. The irony here is that if the ECB have success in increasing their stimulus the palatability of a Eurobond will likely decrease further.

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